SWFs-Global Overview
FLAR Legal Seminar
August 29-39, 2013
Why sovereign wealth management?
 Revenues from extractive industries
 Fiscal smoothing of expenditures
 Permanent wealth/inter-generational equity
 Funding of future pension obligations
 Reserves accumulation from balance of payments
surpluses
Non-commodity funds
• Cumulative fiscal or balance of payments surpluses fund US$2.1 trillion in long term
investment funds for investment income and to meet future pension liabilities
China-Africa Development fund
Brazil - Sovereign Fund of Brazil 1/
New Zealand Superannuation Fund
France- Strategic Investment Fund 1/
Ireland - National Pension Reserve Fund 1/
Malaysia- Khazanah Nasional
Kazakhstan National Bank 1/
Korean Investment Corporation
Australia-Future Fund
China- National Security Fund
Canada- CPP Investment Board
Singapore- Tamasek Holdings
Canada-Caisse de Depot et Plecement du Quebec
Government of Singapore Investment Corporation
Hong Kong Monetary Authority Investment Portfolio
China Investment Corporation
China -SAFE Investment Company
0
Source: Sovereign Wealth Fund institute 2011
1/ Central Banking Publications
100
200
300
400
US$ Billions
500
600
Commodity funds (oil and gas)
• Revenues from extractive industries fund US$2.7 trillion
Trinidad & Tobago -Heritage and Stabilization Fund 1/
Permanent Wyoming Mineral Trust Fund 1/
Saudi Arabia - Public Investment fund 1/
Timor-Leste Petroleum Fund
Botswana-Pula Fund 1/
Oman-State General Reserve Fund
Bahrain - Mumtalakat Holding Company 1/
Alberta's Heritage Savings Trust Fund
Investment Corporation of Dubai
Chile- Social and Economic Stabilization Fund 1/
Iran- National Development fund
State Oil Fund of the Republic of Azerbaiiyan
Brunei Investment Agency 1/
Kasakhstan National Fund 1/
Alaska Permanent Fund
UAE-International Petroleum Investment Company
Algeria - Revenue Regulation Fund 1/
Lybian Investment Authority
Quatar Investment Authority
Russia- National Welfare Funds
Kuwait Investment Authority
Saudi Arabia- SAMA Foreign Holdings
Norway- Government Pension Fund
Abu Dhabi Investment Authority
0
100
200
300
400
US$ Billions
Source: Sovereign Wealth Fund institute 2011
1/ Central Banking Publications
500
600
700
Commodity Funds
 Objectives
 Fiscal stabilization
 Protect tradeable sector from currency appreciation
 Support current spending while investing long term for
intergenerational equity
 Two types of funds
 Integrated fund that both supports current fiscal spending and
invests long term for capital preservation and intergenerational
equity
 Earmarked funds
 Stabilization fund for to smooth fiscal spending
 National pension fund to cover future pension liabilities
 Future funds (unpopular)
Commodity Fund-Integrated
• Funds structural budget deficit
• Guidelines on withdrawals to preserve capital
over time
All commodity
revenues
Norway
Abu Dhabi
Saudi Arabia
Kazakhstan
Azerbaijan
Alberta
Timor-Leste
Botswana
Fund
Budget
Stabilization fund-earmarked
Budget
Chile
Mongolia
Russia
Commodity
revenues
Fund
Government establishes a threshold price level based on the expected long term average
When the current prices exceeds the long term threshold price, “excess” revenues are
paid into the Fund and can be drawn down during periods of below normal prices.
Pension fund-earmarked
 National pension funds funded by contributions (plan) or by
fiscal surpluses to meet future government pension
obligations and invested in overseas assets
 New Zealand Superannuation Fund
 Australia Future Fund
 Chile Pension Reserve Fund
 Russia National Welfare Fund
SWF Governance
 Fiduciary-beneficiary relationship
 Government as “sponsor”
 Enabling legislation
 Investment policy
 Investment process
 Transparency and reporting
 Oversight
 Statutory regulations and standards of care
SWF Institutional Arrangements
Regulation &
delegation of
authority
Legislative
Body
Ministry
Govt Auditor
Executive Board
Supervisory council/external auditor
Asset Manager
Risk, Control &Compliance
Risk and
performance
reporting
Norway’s Government Pension Fund Global
Authorizing legislation
Government Pension Fund Act 2005
Auditor General
Ministry of Finance
Council of
Ethics
Management mandate and Ethical
Guidelines
Governance
Committee
Norges Bank Executive Board
Investment mandate and selection of CEO
CEO
Norges Bank Investment Management
Implementation of Investment Policy
Global
Custodian
Internal
Managers
External
Managers
11
New Zealand Superannuation Fund
New Zealand Superannuation
and Retirement Income Act 2001
Ministry of Finance
General Audit
Appoints Board and sets strategic
investment objectives
Board of Guardians
Sets Investment Policy, responsible investment guidelines, budget
and appoints CEO
CEO
New Zealand Superannuation Fund
Implements Investment policy
Global Custodian
Equity Managers
Fixed income
Managers
Alternative
Managers
12
Asset manager can be dedicated
government agency or central bank
 Most governments have set up a dedicated government
investment agency with its own governance, pay scale and
specialized skill set
 Central bank as asset manager:
 Norway whereby the investment management corporation was
embedded within the central bank
 Emerging market countries with little international investment
infrastructure (East Timor, Botswana, Trinidad &Tobago)
 Stabilization funds that are invested in low risk strategies similar
to investment of foreign currency reserves (Chile, Peru, Mexico)
Policy alternatives to a sovereign
wealth fund
 Domestic investment in state owned enterprises,
development banks and jobs creation (not a good record
but back in vogue)
 Public investment in infrastructure
 Direct dividend to citizens (or reduction in taxes) to foster
private savings and investment
 National asset/liability management—foreign direct
investment in “deficit” sectors; eg Chinese acquisition of
commodity producers and agricultural land
Sovereign Fund Investment Strategies
Official
Reserves/
Central Bank
• External assets for
directly financing
international
payment
imbalances
• Highly liquid,
often OECD
government
bonds
Stabilization
Funds
Pension Funds
Sovereign
Wealth Funds
• Funds to insulate
budget &
economy from
excess volatility,
inflation, Dutch
disease, & other
macro economic
threats
•Investment
vehicles to meet
government’s
future pension
obligations
• Investment
• Companies in
vehicles by
which the state
foreign exchange
has significant
assets
control
• Managed
• May make
separately from
investments in
official reserves
foreign assets
• Typically have a
higher tolerance
for risk
• Low-risk, liquid
assets: cash,
government
bonds
•Funded and
denominated in
local currency
Increasing investment horizon and investment risk
Source: Monitor 2010 SWF Report
State Owned
Enterprises
SWF Strategic Asset Allocation
Australia
Future Fund
Alaska
ADIA
New Zealand
Singapore GIC
Risk
Norway Global
Trinidad
Fixed income
Chile Pension
Equities
Peru Stab
Chile Stab
Alternatives
Expected return
SAA is main driver of wealth generation and investment
income
30
40%
25
30%
20
20%
15
10%
10
0%
Return on a typical Central Bank Portfolio
Return on a diversified Portfolio
Cumulative Return on a typical Central Bank portfolio
Cumulative Return on a Diversified Portfolio
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Jan-89
Jan-88
Jan-87
Jan-86
Jan-85
Jan-84
Jan-83
Jan-82
-20%
Jan-81
0
Jan-80
-10%
Jan-79
5
Typical Central Bank Portfolio: 100% US Government Bonds between 1-3yr ;
Diversified Portfolio: 40% Developed Global Stocks/10% EM Stocks/5% EM Debt/5% Commodities/20% US Treasuries/20% US Corporate Bonds
Source: World
Bank
Treasury
calculations
based on
data on
from
Ibbotson
Bloomberg
Source:
World
Bank
Treasury
calculations
based
data
fromAssociates
Ibbotsonand
Associates
and Bloomberg
17
Annual Return
Cumulative Wealth
Balanced equity/bond vs government bond/cash portfolio (1979 – 2011)
Diversification and modern capital
markets theory
But divide your investments among many places,
for you do not know what risks might lie ahead.
Bible, Ecclesiastes, 935 BC
A portfolio of uncorrelated investments has a lower risk than
any single investment
Harry Markowitz, Modern Portfolio Theory, 1957
Modern paradigm of the prudent person rule
“Prudence is to be found principally in the process by which investment
strategies are developed, adopted, implemented, and monitored in light of
the purposes for which funds are held, invested, and deployed. Prudence
is demonstrated by the process through which risk is managed, rather
than by the definition of specific risks that are imprudent. Under a
modern paradigm, no investment is imprudent per se. The products and
techniques of investment are essentially neutral. It is the way in which
they are used, and how decisions as to their use are made, that should be
examined to determine whether the prudence standard has been met.
Even the most aggressive and unconventional investment should meet
that standard if arrived at through a sound process, while the most
conservative and traditional one may not measure up if a sound process is
lacking.”
Longstreth, B. “Modern Investment Management Theory and the Prudent Person Rule”,1986
Investment strategy by statute or
regulation
Blunt tool that may dictate
 Allowable asset classes
 Minimum rating for allowable investments
 Maximum exposure to a sector or investment (diversification
by regulation)
Portfolio diversification is required to meet long term riskadjusted return targets
Highest
return
Lowest
return
1976 - 1983
1983 - 1990
1990 - 1997
1997 - 2004
2004 - 2011
Real Estate
Developed
Equities
EM Equities
Real Estate
EM Equities
Developed
Equities
Commodities
Real Estate
Commodities
EM Debt
Commodities
US Govt. Bonds
US High Yield
Bonds
EM Debt
US High Yield
Bonds
Cash
US Corporate
Bonds
EM Debt
US Corporate
Bonds
Real Estate
US Corporate
Bonds
US High Yield
Bonds
Developed
Equities
US Govt. Bonds
Commodities
US Govt. Bonds
Cash
Commodities
Developed
Equities
US Govt. Bonds
Real Estate
US Corporate
Bonds
US High Yield
Bonds
US Corporate
Bonds
US Govt. Bonds
Cash
Developed
Equities
Cash
EM Equities
Cash
World Bank Treasury estimates
Source: World Bank Treasury calculations based on data from Bloomberg
How does the legal environment impact
the SAA?
Australia Alaska
Future Fund
ADIA
New Zealand
Norway Global
Risk
Singapore GIC
Trinidad
Chile Pension
Azerbaijan
East Timor
Fixed income
Equities
Peru Stab Chile Stab
Alternatives
Expected return
Threat of liability and impact on portfolio
management
 Contemporary application of the prudent person rule (NZ, Alberta,
Alaska, Australia)
 Focus on investment process
 Role of diversification
 Standards of behavior
 Statutory regulation of allowable investments
 Bright line that provides more protection and less scope for interpretation
 Asset allocation by parliament as “fiduciary” rather than by investment
manager (Norway)
 Where the government is risk adverse or unprepared, can lead to highly
sub-optimal portfolios (East Timor, Russia, Azerbaijan)
 Combination