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Sovereign Wealth Funds


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Sovereign Wealth Funds

  1. 1. Sovereign Wealth Funds Date: 12062008 Second year MiM Stream 2 Group A2
  2. 2. Executive summary Group A2 International financial markets Current impact of SWF on financial markets  SWFs managing the foreign assets of national states have become a significant class of global investors, with assets between $2 and 3 trillion. Sustained accumulation of foreign assets could transform several SWFs into important market players as their financial assets under management could soon exceed those of the largest private asset managers and pension funds.  The policy issues arising from the emergence of SWFs as large global financial players range from concerns over a lack of transparency and a reversal in privatizations to risks to global financial stability.  For example, SWFs could contribute to an unwinding of global imbalances through a diversification out of US dollar- denominated government bonds in which the bulk of traditional reserves is invested.  Another concern relates to the question of whether such funds might distort asset prices through non-commercially motivated purchases or sales of securities.  Over the longer run, any impact of SWFs on global financial market structure and stability will depend critically on the motives underlying the investment decisions of such funds. While fully return and risk-motivated investments may affect financial stability rather positively due to the long-term investment horizon of such funds, non-commercial motives might have a negative impact on financial stability. 2
  3. 3. Agenda Group A2 International financial markets II Assets under management and latest transactions III Where the wealth is coming from and how is it grown? IV Sources of SWFs' assets V Investment objectives vs. Risk tolerance: a comparison of different SWFs VI Transparency rating and political issues VII The role of SWFs during the last year in the financial markets VII Analysis of a commodity SWF: ADIA IX Analysis of a non commodity SWF: Temasek X What can be done to enhance SWF’s in the future? 3
  4. 4. Introduction Group A2 International financial markets Not a new concept Legal Basis Definition 1950 Today  “Kuwait Investment Board was set up with the aim of KIA Brunei Inv. Stabilization CIC  Either SWFs are separate legal entities Fund established under specific constitutive law or a Authority $250 b, 1953 $200 b, 2007 investing surplus oil (Kuwait) $30 b, 1983 $200 b, 2004 (China) revenues to reduce the (Brunei) (Russia) private corporation governed by company law. reliance of Kuwait on its Temasek Norway Govt. QIA Saudi Arabian  Or they are not separate legal entities and are finite oil resource”. $108 b, 1974 Pen. Fund $328 b, 1990 $60 b, 2005 Funds $250 b, 2007 managed as an agency within the government or (Singapore) (Qatar)  Special purpose investment (Norway) (Saudi Arabia) by the central bank. funds or arrangements Khazanah ADIA Future Fund owned by the general $875 b, 1976 Nasional BHD $42 b, 2006 government; (UAE) $18 b, 1993 (Malaysia) (Australia)  whose purpose is to hold, manage, or administer GIC KIC LIA $200 b, 1981 $20 b, 2005 $40 b, 2007 assets to achieve financial (Singapore) (Korea) (Libya) objectives;  employ investment World presence Primary Objectives strategies which include investing in foreign financial assets;  Most SWFs are set up to provide savings for  are commonly established future generations or fiscal stabilization or both. out of BOP surpluses, Their primary objective is long-term returns / official foreign currency United States effective management of entrusted assets Alaska Norway operations, privatization Russia Ireland For some SWFs with future expected Canada proceeds, fiscal surpluses Azerbaijan Kazakhstan  expenditures (i.e. pension reserve funds) the South and/or commodity export United States Korea KuwaitIran China Bahrain receipts. Mexico Libya Qatar UAE Saudi Arabia Oman primary objective is to provide for these future costs. Vietnam Trinidad and Tobago Venezuela Malaysia Brunei Sao Tomé and Principé Singapore Kiribati  Policy objectives are usually publicly disclosed Equatorial Guinea Gabon Timor Leste Chile Angola Botswana Australia New Zealand  Generally do not engage directly in macro polices. 4
  5. 5. Assets under management and latest transactions Group A2 International financial markets Global Financial Assets ($ T) SWFs are in Increasingly High Profile  Sovereign Wealth Funds Transactions (“SWFs”) are a prominent investor class Asset Management Industry AUM $48,1 with their assets rivaling Global Hedge Funds and Retirement Funds AUM $23,6 $9.75 b, Dec 07 $8.83 b, Nov 05 $7.5 b, Nov 07 $6.88 b, Jan 08 Private Equity combined *  Not all SWFs are created Projected Sovereign Wealth Funds $7.5 - $10.0 equal as they lie along a spectrum of risk appetite Foreign Exchange Reserves $5,4  SWFs are hiring best-in- Sovereign Wealth Funds $3,0 China Investment China Investment class investment talents Corp Corp $5.19 b, Aug 07 $5.00 b, Dec 07 $4.40 b, Dec 07 $3.00 b, May 07 to serve long-term Hedge Funds AUM $1,9 investment goals  Governments are Private Equity AUM $1,3 weighing perceived threats of SWFs against Assets Under Management($ b) potential benefits. Managing political risk in SWF-related transactions is key 5
  6. 6. Where the wealth is coming from and how is it grown? Group A2 International financial markets World current account balance trends ($ b)  Surge in commodity prices  Dramatic increase in current account surpluses 1,200 in Asia 800  Willingness of governments to allocate 400 US more funds from Foreign Exchange Reserves to Euro 0 Sovereign Wealth Funds Asia 1997 1999 2001 2003 2005 2007  A reallocation of excess -400 Oil exporters reserves would trigger net capital outflows out of US -800 assets at an order of magnitude of around USD -1,200 500 billion  The counterpart of these Global Current Account Balance 2007 net outflows from the United States and the euro area are mainly Japan and emerging economies, Deficits Surpluses reflecting the relatively large weight of these countries in global capital Western Hemisphere markets compared with $20B Russia / their negligible role as Other Advanced CIS reserve currencies. US $77B Asia (ex- $19B $784B Japan) Middle $480B C&E Japan Eurozone East Europe $195B $227B $120B $21B Global Current Account Balance 2007 6
  7. 7. Sources of SWFs’ assets Group A2 International financial markets Oil exporting countries’ foreign investments SWFs of resource rich countries assets (% share, end-2007) Central Banks High Net This group of countries that have established SWFs are reserve Worth 100% having benefits from high oil and commodity prices. The assets Individual function of SWF of these countries are: Total: USD 4,1 trillion 13% s 80%  stabilizing government and export revenues which 39% 60% would otherwise mirror the volatility of oil and commodity prices. 40%  the accumulation of savings for future generations as 20% natural resources are non-renewable and are anticipated to be exhausted after some time. 0% SWFs 48% Oil Other Official foreign exchange reserves SWFs of FX currency rich countries % share, end-2007 100% This group of countries, most notably in Asia, has established Asian official SWFs because reserves are being accumulated in excess of SWFs FX reserves what may be needed for intervention or balance-of-payment 80% 19% not in purposes. The source of reserve accumulation for these Sovereign Wealth countries is related to the management of inflexible exchange 60% Funds rate regimes. As the authorities have become more 44% comfortable with reserve levels, foreign assets have been 40% moved to specialized agencies which often have explicit return objectives and may invest in more risky assets than 20% central banks. Total: USD 6,5 trillion Rest of world 0% official FX reserves FX Reserves Other 37% 7
  8. 8. Investment objectives vs. Risk tolerance: a comparison of different SWFs Group A2 International financial markets Strategic Behaviors  SWFs have undertaken Low Risk Tolerance High substantial investments Stabilization Cash across national borders / Strategic  The great majority of Gov’t Fixed Stake Real Hedge Private Leveraged sovereign funds are Examples Bonds Income Equity Building Estate Funds Equity Buyouts passive investors. Russian  unlike hedge funds and Stabilization private equity funds, SWFs Fund typically are not highly Investment Objective Norwegian leveraged institutions Government  The bulk of SWF Pension Fund investments have been concentrated in developed Abu Dhabi Investment countries; Southern Authority countries (particularly in Asia) are a relatively new Kuwait investment destination Investment Authority  since SWFs have no explicit liabilities, they usually have a long-term Temasek investment horizon combined with a high Qatar tolerance for risk. They Investment therefore tend to invest in Authority illiquid and higher-yielding risky instruments property and securities that are not actively traded Wealth Accumulation 8
  9. 9. Transparency rating and political issues Group A2 International financial markets How to improve transparency The growing importance of SWFs raises a number international policy issues:  Imposing reporting requirements on holdings thresholds  State-controlled foreign  Applying market integrity rules to govern insider investments may be trading, fiduciary responsibility, and the like sensitive both from a  Subjecting investments in supervised financial political and economical institutions (e.g., banks, insurance companies) to prudential rules perspective, as the lack of transparency of SWFs  Imposing possible restrictions or approval requirements on funds that attempt to increase holdings beyond causes concerns about some level the motivation of these  Using special agencies to review investments based on funds’ investments, national security considerations (e.g., Committee on aggravating protectionist Foreign Investments in the U.S.) pressures.  Restricting investments based on national security or  The G7 stated that any public order restrictions on SWF  Subjecting investments in certain sectors of social investments should be importance to special laws minimized and only  Scrutinizing SWFs for anti-monopoly or take-over “apply to very limited restrictions cases which primarily concern national How to evaluate a SWF: the Truman’s scoreboard security”. It is possible to classify SWFs by analyzing 4 their main features:  Structure (information about funds provenience, goals, strategy, fiscal treatment, separation from national reserves)  Governance (role of government and management, presence of corporate responsibility policies,  Transparency and Accountability (annual and quarterly report, information on investments and their returns)  Behavior (information on the speed and nature of change of strategy caused by market changes) 9
  10. 10. The role of SWFs during the last year in the financial markets Group A2 International financial markets  At the beginning of 2007 Western banks were the undisputed leaders of global finance.  ABN AMRO was bought by a consortium of leading European banks led by RBS  Barclays escaped to be nationalized it now has a consortium of government affiliated investment vehicles from Qatar and UAE as its controlling shareholder.  Citigroup has received numerous capital injections from SWFs in Asia and the Middle East.  The central role these large financial intermediaries has been taken over by governments and SWFs  They have provided the lifeline without which many of these intermediaries, and indeed the global financial system, may well have collapsed. 10
  11. 11. Analysis of a commodity SWF: ADIA Group A2 International financial markets History Where does it take funds from?  Established in 1976 as a replacement of the  The Abu Dhabi National Oil Company (ADNOC) Financial Investments Board created in 1967 part and its subsidiaries pay a dividend to help fund of the then Abu Dhabi Ministry of Finance. ADIA and its sister fund Abu Dhabi Investment  It is rumored to be the largest of the Sovereign Council (ADIC) Wealth Funds.  About receiving 70% of any budget surplus is sent  It is wholly owned and subject to supervision by to ADIA, while the other 30% of surplus goes to the government of Abu Dhabi. the Abu Dhabi Investment Council (ADIC).  The fund is an independent legal identity with full capacity to act in fulfilling its statutory mandate and objectives. Investments by assets classes Main features Asset classes Assets under management: USD 627 billion 50% Origin: Oil 40% Entity structure: Fund 30% Firm investment style: Mixed* 20% Transparency rating: 3 10% 0% Private Equity Cash Infrastructure Real Estate Developed Equities Governements bonds Non governments bonds Small cap equities Alternative Investments Emerging markets equities 11
  12. 12. Analysis of a non commodity SWF: Temasek (1 of 2) Group A2 International financial markets Shareholders return Investment strategy  Transforming Economies - We invest in industry sectors that correlate with the economic transformation of the country  Growing Middle Class - We find opportunities in companies and industries whose growth is fuelled by the increasing purchasing power of the middle class  Deepening Comparative Advantages - We tap the potential of competitively-positioned companies  Emerging Champions - We identify companies proving to be best-in-class, be it regionally or globally Investments by assets classes Main features Assets under management: USD 85 billion Origin: Non commodity Entity structure: Corporate Firm investment style: Portfolio Transparency rating: 10 Moody’s rating: Aaa 12
  13. 13. Analysis of a non commodity SWF: Temasek (2 of 2) Group A2 International financial markets Attributes  The success of the Singapore model can be ascribed to its proactive investment style that emanates from aligning its investment strategy with its socioeconomic strategy.  They are run on a commercial basis receiving no special privileges because they are state- owned. Government ownership is exercised through Temasek Holdings, a state company, whose board members and chairman are appointed, and performance-based rewards are sanctioned, by government  Temasek Holdings- managed state enterprises account currently for about 60 percent of Singapore’s GDP. 13
  14. 14. What can be done to enhance SWF’s in the future? Group A2 International financial markets Leverage SOEs Enhance Regional and International Cooperation Mitigate Economic  State owned enterprises Downturns dominate the economies Transfer Knowledge  Establishment of joint funds  Opportunities may exist to through Investments both at the regional and at manage groups of SOEs the international levels. under one holding.  Use their wealth in slow Regionally, benefits from  This will allow governments economic times to spur joint funds include sharing of to reap important business economic growth and maintain risk and increased investment synergies, as well as  Support of local economic funding of critical strategic opportunities. economies of scale and growth strategies through investments. scope. international and domestic  Internationally, joint funds  Norway’s SWF, for example, is can facilitate market investments. supporting infrastructure penetration and enhance  International investments the projects in light of the global understanding of new business knowledge transfer financial crisis in order to mechanisms. models, operations, and sustain Norway’s economic strategies. growth.  Investments in multinational corporations help bring in sought-after technologies and knowledge 14
  15. 15. Group A2 International financial markets Thank for your attention 15