By Kevin Lim
SINGAPORE, Oct 11 (Reuters) - Mapletree Industrial Trust, a property trust linked to Singapore state investor Temasek, will raise at least S$853 million after pricing its IPO at the top of the indicative range, sources said on Monday.
Mapletree Industrial will sell units at S$0.93 each, which translates to an annualised dividend yield of about 7.6 percent. The trust had earlier set a indicative range of S$0.88 to S$0.93 a unit.
"It's at the top of the range... 93 (Singapore) cents," a source involved in the deal told Reuters.
The property trust, which owns factories and other industrial properties in Singapore, will update its draft prospectus and launch the retail portion of the initial public offering on Tuesday, a second source said.
The sources declined to be named because the information had not been made public.
Mapletree Industrial's IPO, coincides with a larger $3 billion offering by GIC's Global Logistic Properties (GLP) and pits Singapore's two sovereign funds in a battle for institutional and retail investors.
Analysts said both property-themed IPOs gathered a strong response from institutional investors, despite the overlap in the offer period, as they offer exposure to different countries.
Mapletree Industrial is a dividend play based on Singapore assets while GLP offers exposure to China's fast-growing economy.
The dividend yield offered by Mapletree Industrial is well above the 0.1-0.2 percent annual interest rate paid on Singapore dollar deposits.
Mapletree Industrial, which is managed by Mapletree Investments, is selling 594.9 million units with an option to increase the offer by another 91.75 million units, according to the draft prospectus.
Cornerstone investors including insurers AIA and Prudential, UK fund manager Henderson and U.S. hedge fund D.E. Shaw will subscribe for another 322.6 million units.
Mapletree Industrial will also sell 359.4 million units to two firms linked to Mapletree Investments, a wholly owned unit of Temasek.
Including the greenshoe option but excluding the placement to the firms linked to Mapletree Investments, the IPO could raise as much as S$940 million.
DBS, Citigroup, Goldman Sachs and Standard Chartered are bookrunners, issue managers and underwriters for the Mapletree Industrial IPO.
DBS and Citi are also involved in GIC's IPO alongside JPMorgan JPM.N , UBS UBSN.VX and CICC.
Source: business.asiaone.com
Monday, October 11, 2010
Mapletree Industrial I.P.O. Said to Raise $654 Million
Mapletree Industrial Trust, a property trust linked to Temasek Holdings, the Singapore state-owned sovereign wealth fund, will raise at least 853 million Singapore dollars ($654 million) after pricing its initial public offering at the top of the indicative range, Reuters reported, citing sources.
Mapletree Industrial will sell units at 0.93 Singapore dollars each, which translates to an annualized dividend yield of about 7.6 percent, the news service said. The trust had earlier set a indicative range of 0.88 Singapore dollars to 0.93 Singapore dollars a unit.
Source: dealbook.blogs.nytimes.com
Mapletree Industrial will sell units at 0.93 Singapore dollars each, which translates to an annualized dividend yield of about 7.6 percent, the news service said. The trust had earlier set a indicative range of 0.88 Singapore dollars to 0.93 Singapore dollars a unit.
Source: dealbook.blogs.nytimes.com
Bank Of China: Central Huijin Bought 0.002% Of Share Capital In 12 Months
BEIJING (Dow Jones)--Central Huijin Investment Ltd., the domestic investment arm of China's sovereign wealth fund, raised its stake in Bank of China Ltd. (3988.HK) by 0.0021% over the last year, the lender said in a statement Monday.
Central Huijin Investment bought a total of 5.13 million A-shares, or 0.0021% of the lender's total issued share capital, in the open market in the roughly 12 months through Oct. 8, Bank of China said.
The purchases raise Central Huijin Investment's stake in the bank to 67.53%, the bank said.
FRONTIERS-Sovereign wealth rewrites old-world rules
By Natsuko Waki
(Reuters journalists have produced a special multimedia package on frontier markets including stories, video reports, pictures, research and graphics. To see the full package click here)
* SWFs often enormous, established fish in small ponds
* Their need for discretion suits many "frontier" targets
* Declining rich-world power weakens push for transparency
LONDON, May 27 (Reuters) - Sovereign wealth funds -- national vehicles created to grow state wealth for the future -- have long experience investing in exotic and lesser-known lands. To these funds, many of which originate in what the West calls the "frontier" region, it's a local market.
This year alone, countries including China, Singapore, South Korea, Kazakhstan, Azerbaijan and Abu Dhabi have invested easily more than $1 billion in frontier markets, in such projects as mines in Mongolia and companies in Africa, the Caribbean and Latin America.
The often secretive heavyweights of the financial world, sovereign funds control around $3-4 trillion in assets and include some established players on tricky terrain. Because their investments are so influential, their presence can be manipulated to wrong-foot other investors.
So the sovereign wealth funds' tendency to be opaque adds to the challenge for investors in frontier markets. But beyond this, they are also having a broader influence, bringing a "frontier factor" to the rest of the world.
"Most SWFs are themselves a creation that should be looked at in the context of frontier markets," said Alexander Mirtchev, independent director of a sovereign wealth fund from the "frontier" region and a member of the board of trustees on the Kissinger Institute on China and the United States.
"The frontier is part of their DNA, and this 'frontier make-up' to a large extent determines their competitive advantages, as well as in some cases the problems that SWFs sometimes face."
Backed by leverage-free reserves beyond the dreams of most indebted rich-world countries, the funds' "south-south" investment is more than a sideshow: it's reinforcing their role as powerbrokers of global markets.
HISTORY LESSON
To get the picture it's worth considering that in a sense, sovereign funds have been actively investing on the frontiers for at least 400 years.
The East India Company -- an English trading company in the 17-19th centuries backed by the state -- functioned loosely like a modern sovereign wealth fund. It pursued trade in commodities including spice, cotton, tea and opium in the then-frontier markets of China and India, creating regional markets and helping develop local economies.
Other European corporations including the 17th-century Dutch East India Company, VOC, served as tools of colonial power -- an extension of states -- just as do some sovereign funds today.
The difference between the pioneers of the past and the present is that today, much of the wealth and influence come not from the modern rich world, but from resource-rich countries with very different values.
SOUTH-SOUTH TIES
Concrete figures are hard to come by, but experts estimate the allocation of sovereign wealth fund assets to frontier markets is less than 5 percent.
That would translate into $150 billion, which eclipses the total market capitalization of the benchmark MSCI Frontier Markets equity index at $120 billion.
What for the funds is small exposure makes a huge difference to recipients. Their presence brings mutual benefits.
The funds and their targets in poor countries often have shared experience on the economic margins, which fosters a cultural affinity.
Countries on the investment frontiers desperately need long-term capital, which sovereign wealth funds can provide.
Recent economic ructions in the West add to the incentive for stronger ties: the risk in developed-market investments has increased, but the prospect of commensurate rewards has not.
Sovereign funds are keen to diversify into illiquid but higher-yielding assets in frontier economies in the hope of providing returns for future generations. And unlike the quarter-to-quarter reporting required from companies in the West, these funds can wait a long time before showing returns.
"Most SWFs are seeking new and untapped sources of diversification and alpha generation," said Cynthia Sweeny Barnes, global head of sovereigns and supranationals at HSBC Global Asset Management.
"Frontier markets offer interesting risk-reward dynamics, particularly for investors with permanent capital. The low level of information in frontier markets creates often significant pricing inefficiencies, which active investors can exploit."
SHHHH
Modern sovereign funds have been thrust further into the global economic limelight since the credit crisis cut funding for the hedge funds and private equity groups that had been cocks of the walk.
Only a few years ago, Western politicians were making headlines with attacks on sovereign funds for their secretive ways: behind this were fears their motives were political, rather than commercial.
Keen to be accepted, many did make an effort to open up. But since the credit crisis, political calls for greater transparency from the funds have quietened.
"Once regarded as subversive agents of state capitalism, they are now sought-after providers of capital," Sven Behrendt, a visiting scholar at the Carnegie Middle East Center, said in a study for the centre this month.
"Their growth dynamic suggests that their investment and policy behavior will resonate across the global economy."
These funds need a degree of secrecy to function.
Already, their investment decisions are closely followed by the wider investment community, as the global importance of the industry grows. It is forecast by Deutsche Bank to more than double in less than 10 years.
In a fiercely competitive investment environment, others in the market sniff about for deals that anticipate the moves sovereign funds will make. A practise known as front-running, that risks pushing up prices before the funds invest.
"Because we are generally large institutional investors, there is the whole community of investment banks, brokers, analysts and others who want to front-run our investments in the market," David Murray, chairman of the board of guardians at Australia's Future Fund, told a news conference last October.
"In doing so they would use all sorts of techniques to find out from us exactly where we are in the market in terms of timing. It is not in the interest of the funds nor our community to be involved in that game because it would be detrimental to our investment returns."
(Reuters journalists have produced a special multimedia package on frontier markets including stories, video reports, pictures, research and graphics. To see the full package click here)
* SWFs often enormous, established fish in small ponds
* Their need for discretion suits many "frontier" targets
* Declining rich-world power weakens push for transparency
LONDON, May 27 (Reuters) - Sovereign wealth funds -- national vehicles created to grow state wealth for the future -- have long experience investing in exotic and lesser-known lands. To these funds, many of which originate in what the West calls the "frontier" region, it's a local market.
This year alone, countries including China, Singapore, South Korea, Kazakhstan, Azerbaijan and Abu Dhabi have invested easily more than $1 billion in frontier markets, in such projects as mines in Mongolia and companies in Africa, the Caribbean and Latin America.
The often secretive heavyweights of the financial world, sovereign funds control around $3-4 trillion in assets and include some established players on tricky terrain. Because their investments are so influential, their presence can be manipulated to wrong-foot other investors.
So the sovereign wealth funds' tendency to be opaque adds to the challenge for investors in frontier markets. But beyond this, they are also having a broader influence, bringing a "frontier factor" to the rest of the world.
"Most SWFs are themselves a creation that should be looked at in the context of frontier markets," said Alexander Mirtchev, independent director of a sovereign wealth fund from the "frontier" region and a member of the board of trustees on the Kissinger Institute on China and the United States.
"The frontier is part of their DNA, and this 'frontier make-up' to a large extent determines their competitive advantages, as well as in some cases the problems that SWFs sometimes face."
Backed by leverage-free reserves beyond the dreams of most indebted rich-world countries, the funds' "south-south" investment is more than a sideshow: it's reinforcing their role as powerbrokers of global markets.
HISTORY LESSON
To get the picture it's worth considering that in a sense, sovereign funds have been actively investing on the frontiers for at least 400 years.
The East India Company -- an English trading company in the 17-19th centuries backed by the state -- functioned loosely like a modern sovereign wealth fund. It pursued trade in commodities including spice, cotton, tea and opium in the then-frontier markets of China and India, creating regional markets and helping develop local economies.
Other European corporations including the 17th-century Dutch East India Company, VOC, served as tools of colonial power -- an extension of states -- just as do some sovereign funds today.
The difference between the pioneers of the past and the present is that today, much of the wealth and influence come not from the modern rich world, but from resource-rich countries with very different values.
SOUTH-SOUTH TIES
Concrete figures are hard to come by, but experts estimate the allocation of sovereign wealth fund assets to frontier markets is less than 5 percent.
That would translate into $150 billion, which eclipses the total market capitalization of the benchmark MSCI Frontier Markets equity index at $120 billion.
What for the funds is small exposure makes a huge difference to recipients. Their presence brings mutual benefits.
The funds and their targets in poor countries often have shared experience on the economic margins, which fosters a cultural affinity.
Countries on the investment frontiers desperately need long-term capital, which sovereign wealth funds can provide.
Recent economic ructions in the West add to the incentive for stronger ties: the risk in developed-market investments has increased, but the prospect of commensurate rewards has not.
Sovereign funds are keen to diversify into illiquid but higher-yielding assets in frontier economies in the hope of providing returns for future generations. And unlike the quarter-to-quarter reporting required from companies in the West, these funds can wait a long time before showing returns.
"Most SWFs are seeking new and untapped sources of diversification and alpha generation," said Cynthia Sweeny Barnes, global head of sovereigns and supranationals at HSBC Global Asset Management.
"Frontier markets offer interesting risk-reward dynamics, particularly for investors with permanent capital. The low level of information in frontier markets creates often significant pricing inefficiencies, which active investors can exploit."
SHHHH
Modern sovereign funds have been thrust further into the global economic limelight since the credit crisis cut funding for the hedge funds and private equity groups that had been cocks of the walk.
Only a few years ago, Western politicians were making headlines with attacks on sovereign funds for their secretive ways: behind this were fears their motives were political, rather than commercial.
Keen to be accepted, many did make an effort to open up. But since the credit crisis, political calls for greater transparency from the funds have quietened.
"Once regarded as subversive agents of state capitalism, they are now sought-after providers of capital," Sven Behrendt, a visiting scholar at the Carnegie Middle East Center, said in a study for the centre this month.
"Their growth dynamic suggests that their investment and policy behavior will resonate across the global economy."
These funds need a degree of secrecy to function.
Already, their investment decisions are closely followed by the wider investment community, as the global importance of the industry grows. It is forecast by Deutsche Bank to more than double in less than 10 years.
In a fiercely competitive investment environment, others in the market sniff about for deals that anticipate the moves sovereign funds will make. A practise known as front-running, that risks pushing up prices before the funds invest.
"Because we are generally large institutional investors, there is the whole community of investment banks, brokers, analysts and others who want to front-run our investments in the market," David Murray, chairman of the board of guardians at Australia's Future Fund, told a news conference last October.
"In doing so they would use all sorts of techniques to find out from us exactly where we are in the market in terms of timing. It is not in the interest of the funds nor our community to be involved in that game because it would be detrimental to our investment returns."
Pershing Square Back In Activist Thick of Things
by Paula Schaap ,Senior Reporter , October 11, 2010
After hedge fund manager Bill Ackman lost a hard-fought proxy battle with Target last year, he went radio silent for a time.
Unusual for a hedge fund manager, Ackman, who manages about $3.5 billion at Pershing Square Capital Management, was very vocal and open with the media during his Target campaign.
This year, Ackman may be clamming up with the media, but that doesn’t mean he’s changed his activist stripes.
Last week, the hedge fund manager revealed a 16.5% stake in retailer J.C. Penney Co. He also has a nearly 11% stake in consumer conglomerate Fortune Brands.
Fortune Brands’ has three divisions that encompass liquor distribution, golf and home hardware and security. The odd match suggests that Ackman might pressure the company to spinoff some of its holdings.
Fortune Brands opened Monday at $55.35 per share, essentially flat from Friday’s close at $55.85.
Ackman’s filings for both J.C. Penney and Fortune say that their stock was undervalued and that he was going to hold discussions with company management and shareholders; which is activist hedge fund manager speak for proxy battle.
The J.C. Penney filing had the added fillip of a statement that Pershing Square might ally with commercial real estate company Vornado Realty Trust, which said in a regulatory filing it had about 10% of the retailer.
Besides all that activity, Ackman is also involved with the foreclosure auction of the huge Manhattan apartment complex Stuyvesant Town.
Ackman, who with Winthrop Realty Trust, owns about $300 million of debt on the property, went into court to try to wrest control away from CW Capital, which services the $3 billion mortgage that is in foreclosure.
Ackman’s suit was tossed out of court, but he is still enough of a force to be reckoned with that the auction was put off while he negotiates with CW Capital.
Source: www.hedgefund.net
After hedge fund manager Bill Ackman lost a hard-fought proxy battle with Target last year, he went radio silent for a time.
Unusual for a hedge fund manager, Ackman, who manages about $3.5 billion at Pershing Square Capital Management, was very vocal and open with the media during his Target campaign.
This year, Ackman may be clamming up with the media, but that doesn’t mean he’s changed his activist stripes.
Last week, the hedge fund manager revealed a 16.5% stake in retailer J.C. Penney Co. He also has a nearly 11% stake in consumer conglomerate Fortune Brands.
Fortune Brands’ has three divisions that encompass liquor distribution, golf and home hardware and security. The odd match suggests that Ackman might pressure the company to spinoff some of its holdings.
Fortune Brands opened Monday at $55.35 per share, essentially flat from Friday’s close at $55.85.
Ackman’s filings for both J.C. Penney and Fortune say that their stock was undervalued and that he was going to hold discussions with company management and shareholders; which is activist hedge fund manager speak for proxy battle.
The J.C. Penney filing had the added fillip of a statement that Pershing Square might ally with commercial real estate company Vornado Realty Trust, which said in a regulatory filing it had about 10% of the retailer.
Besides all that activity, Ackman is also involved with the foreclosure auction of the huge Manhattan apartment complex Stuyvesant Town.
Ackman, who with Winthrop Realty Trust, owns about $300 million of debt on the property, went into court to try to wrest control away from CW Capital, which services the $3 billion mortgage that is in foreclosure.
Ackman’s suit was tossed out of court, but he is still enough of a force to be reckoned with that the auction was put off while he negotiates with CW Capital.
Source: www.hedgefund.net
Paulson Joins PE Firms on $3.9B Deal
by Marc Raybin ,Editor October 11, 2010
After working through bankruptcy proceedings for a year, Extended Stay hotels has emerged with a new consortium of owners in a deal valued at $3.925 billion.
Private equity firms Centerbridge Partners and The Blackstone Group have teamed with hedge fund firm Paulson & Co. on the deal to acquire the hotel chain. The group’s deal to buy Extended Stay was approved by the bankruptcy court in July as part of the reorganization plan.
As part of the deal which has now closed, Extended Stay reduced its debt load by nearly $5 billion, according to a statement.
A spokesman from Paulson & Co. said the firm was not commenting on the deal beyond the statement. A representative from Centerbridge did not return a message seeking additional information about the deal, and a spokesperson from Blackstone did not immediately return a message.
HVM, the former owner of Extended Stay, will continue to manage the properties, according to the statement. All 685 properties in the Extended Stay portfolio remained open during the year-long bankruptcy proceedings and will continue to be managed by HVM.
Extended Stay is based in Spartanburg, S.C. The company has locations throughout the United States and Canada, employing 9,000 people. The new ownership will look to make property improvements and renovations, according to the statement.
Doug Geoga has become the non-executive chairman of the board at Extended Stay with the closing of the deal. He was previously the president of Global Hyatt Corp.
Centerbridge has $12 billion in capital under management. Limited partners in the firm’s funds include university endowments, pensions, sovereign wealth funds and charitable trusts. The firm was founded in 2006, focusing on private equity and credit investments.
Paulson & Co. was founded in 1994 by John Paulson, one of the most prominent hedge fund managers in the asset class. His firm has $32 billion in assets under management in offices in New York and London.
Blackstone is one of the biggest alternative asset managers in the business. The firm manages a variety of private equity funds, hedge funds, and real estate funds. It also has an advisory business.
Source: www.hedgefund.net
After working through bankruptcy proceedings for a year, Extended Stay hotels has emerged with a new consortium of owners in a deal valued at $3.925 billion.
Private equity firms Centerbridge Partners and The Blackstone Group have teamed with hedge fund firm Paulson & Co. on the deal to acquire the hotel chain. The group’s deal to buy Extended Stay was approved by the bankruptcy court in July as part of the reorganization plan.
As part of the deal which has now closed, Extended Stay reduced its debt load by nearly $5 billion, according to a statement.
A spokesman from Paulson & Co. said the firm was not commenting on the deal beyond the statement. A representative from Centerbridge did not return a message seeking additional information about the deal, and a spokesperson from Blackstone did not immediately return a message.
HVM, the former owner of Extended Stay, will continue to manage the properties, according to the statement. All 685 properties in the Extended Stay portfolio remained open during the year-long bankruptcy proceedings and will continue to be managed by HVM.
Extended Stay is based in Spartanburg, S.C. The company has locations throughout the United States and Canada, employing 9,000 people. The new ownership will look to make property improvements and renovations, according to the statement.
Doug Geoga has become the non-executive chairman of the board at Extended Stay with the closing of the deal. He was previously the president of Global Hyatt Corp.
Centerbridge has $12 billion in capital under management. Limited partners in the firm’s funds include university endowments, pensions, sovereign wealth funds and charitable trusts. The firm was founded in 2006, focusing on private equity and credit investments.
Paulson & Co. was founded in 1994 by John Paulson, one of the most prominent hedge fund managers in the asset class. His firm has $32 billion in assets under management in offices in New York and London.
Blackstone is one of the biggest alternative asset managers in the business. The firm manages a variety of private equity funds, hedge funds, and real estate funds. It also has an advisory business.
Source: www.hedgefund.net
GM Said to Approach Sovereign Wealth Funds to Boost Stock Sale
Investment bankers for General Motors Co. have met with sovereign wealth funds and private investors in the Middle East and Asia to gauge interest in the automaker’s planned stock sale, said two people familiar with the meetings.
GM’s bankers had planned to approach Riyadh, Saudi Arabia- based Kingdom Holding Co., Abu Dhabi-based Mubadala Development Co., Qatar Holdings LLC and Singapore-based Temasek Holdings Pte. about GM’s initial public offering, said one of the people, who asked not to be named because the discussions are private.
Seeking large international investors is one way for the nation’s largest automaker to generate demand for its stock in preparation for an IPO next month. GM and its bankers are forging ahead with the stock offering in a year when at least 47 companies have postponed or withdrawn U.S. IPOs, two people familiar with the plan said.
“We have seen sovereign wealth funds involved with the larger international deals,” said Matt Therian, research analyst with Renaissance Capital LLC, a Greenwich, Connecticut- based research firm that has studied IPOs since 1991. “This is not a $100 million tech firm we’re talking about. This is a very large deal and it’s still a market that has pricing pressure.”
GM and the U.S. Treasury Department, which owns 61 percent of the company, aim to hold an $8 billion to $10 billion IPO in November, which is scaled back from the company’s original plan of as much as $16 billion, two people familiar with the matter said last month. The department is more interested in a high share price than a large initial sale, they said.
A GM spokeswoman, Noreen Pratscher, declined to comment.
‘Buyer’s Market’
A $10 billion share sale by GM would be the biggest U.S. IPO since Visa Inc.’s $19.7 billion raised in March 2008. The offering would be the third-largest all-time in the U.S., also trailing AT&T Wireless Group’s $10.6 billion offering in 2000.
The largest deal to be postponed this year was Liberty Mutual Agency Corp.’s proposed $1.3 billion IPO. The company delayed its offering on Sept. 29 because demand was below expectations, the insurer said. Had the deal gone through it would have been the biggest U.S. IPO so far in 2010.
“It’s very much a buyer’s market,” Therian said. “Companies have to come up with a realistic view of what they are worth. A lot of deals are being priced below their proposed range.”
While the market has been tough on some deals, Therian said that the right IPOs can still get done. IPOs in the U.S. have raised $20.95 billion so far this year, 95 percent more than the same period a year ago, data compiled by Bloomberg show.
‘Right Direction’
“It’s not where it was in mid-decade, but it’s headed in the right direction,” Therian said.
Petroleo Brasileiro SA, Brazil’s state-controlled oil producer, raised as much as $70 billion last month in the world’s largest share sale as investors bet on its plans to double output within a decade by tapping offshore fields.
A large GM offering at a lower share price would place more pressure on the government to win higher prices in future offerings, two people said. GM and its investment banks had considered a deal worth $12 billion to $16 billion, people familiar with the plans said in August.
For the U.S. to recoup its $50 billion investment in GM, it needs to sell at an average price, before splits, of $131 a share, said a person familiar with the matter. The stock will likely be split to sell at an initial price of around $20 a share, said one person familiar with the offering.
Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, put the figure at $133.78, before splits. While the U.S. bailout was paid for with TARP money, only a portion of the government’s stake will be sold in the initial offering.
Auto Holdings
Sovereign funds, which may buy stock in GM to diversify away from oil and gas investments, tend to be large, patient, investors who keep broad portfolios, three of the people said. They also don’t quibble over the price, nor do they agitate for management changes, two of the people said.
Qatar is the third-largest shareholder in Volkswagen AG with a $5.22 billion stake, according to data compiled by Bloomberg. It also owns London’s Harrods Department Store Co. Mubadala has a stake in Fiat SpA’s Ferrari SpA.
Abu Dhabi’s Aabar Investments PJSC is the largest shareholder in Daimler AG, the maker of Mercedes-Benz cars, with a 9.08 percent stake, according to data compiled by Bloomberg. Second-largest is Kuwait Investment Authority, with 6.89 percent of the Stuttgart, Germany-based automaker.
SAIC Motor Corp. Ltd. may also buy some stock in GM. The Shanghai-based automaker is one of GM’s partners in China. The Treasury Department is willing to sell the company at most 1 percent of GM, two people said.
Sales Tide
GM is still planning a November IPO, said the people. The company has not committed to a date and may delay if demand for shares were to falter.
Even in a tough market, GM’s IPO should generate plenty of interest, said David Whiston, equity analyst with Morningstar Inc., a Chicago-based investment research firm. Auto sales in the U.S. appear to have bottomed out around 11.5 million vehicles a year. Any rise in the car market bodes well for GM stock, he said.
September sales rose to an annual rate of 11.8 million, the highest since the federal “cash for clunkers” incentives ended in August 2009, according to Autodata Corp.
“If you take the thesis that selling 11.5 million vehicles is way too low, of course GM will be minting money,” Whiston said. “This is a blue-chip company. There will be tons of interest from overseas investment companies.”
Source: bloomberg.net
GM’s bankers had planned to approach Riyadh, Saudi Arabia- based Kingdom Holding Co., Abu Dhabi-based Mubadala Development Co., Qatar Holdings LLC and Singapore-based Temasek Holdings Pte. about GM’s initial public offering, said one of the people, who asked not to be named because the discussions are private.
Seeking large international investors is one way for the nation’s largest automaker to generate demand for its stock in preparation for an IPO next month. GM and its bankers are forging ahead with the stock offering in a year when at least 47 companies have postponed or withdrawn U.S. IPOs, two people familiar with the plan said.
“We have seen sovereign wealth funds involved with the larger international deals,” said Matt Therian, research analyst with Renaissance Capital LLC, a Greenwich, Connecticut- based research firm that has studied IPOs since 1991. “This is not a $100 million tech firm we’re talking about. This is a very large deal and it’s still a market that has pricing pressure.”
GM and the U.S. Treasury Department, which owns 61 percent of the company, aim to hold an $8 billion to $10 billion IPO in November, which is scaled back from the company’s original plan of as much as $16 billion, two people familiar with the matter said last month. The department is more interested in a high share price than a large initial sale, they said.
A GM spokeswoman, Noreen Pratscher, declined to comment.
‘Buyer’s Market’
A $10 billion share sale by GM would be the biggest U.S. IPO since Visa Inc.’s $19.7 billion raised in March 2008. The offering would be the third-largest all-time in the U.S., also trailing AT&T Wireless Group’s $10.6 billion offering in 2000.
The largest deal to be postponed this year was Liberty Mutual Agency Corp.’s proposed $1.3 billion IPO. The company delayed its offering on Sept. 29 because demand was below expectations, the insurer said. Had the deal gone through it would have been the biggest U.S. IPO so far in 2010.
“It’s very much a buyer’s market,” Therian said. “Companies have to come up with a realistic view of what they are worth. A lot of deals are being priced below their proposed range.”
While the market has been tough on some deals, Therian said that the right IPOs can still get done. IPOs in the U.S. have raised $20.95 billion so far this year, 95 percent more than the same period a year ago, data compiled by Bloomberg show.
‘Right Direction’
“It’s not where it was in mid-decade, but it’s headed in the right direction,” Therian said.
Petroleo Brasileiro SA, Brazil’s state-controlled oil producer, raised as much as $70 billion last month in the world’s largest share sale as investors bet on its plans to double output within a decade by tapping offshore fields.
A large GM offering at a lower share price would place more pressure on the government to win higher prices in future offerings, two people said. GM and its investment banks had considered a deal worth $12 billion to $16 billion, people familiar with the plans said in August.
For the U.S. to recoup its $50 billion investment in GM, it needs to sell at an average price, before splits, of $131 a share, said a person familiar with the matter. The stock will likely be split to sell at an initial price of around $20 a share, said one person familiar with the offering.
Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, put the figure at $133.78, before splits. While the U.S. bailout was paid for with TARP money, only a portion of the government’s stake will be sold in the initial offering.
Auto Holdings
Sovereign funds, which may buy stock in GM to diversify away from oil and gas investments, tend to be large, patient, investors who keep broad portfolios, three of the people said. They also don’t quibble over the price, nor do they agitate for management changes, two of the people said.
Qatar is the third-largest shareholder in Volkswagen AG with a $5.22 billion stake, according to data compiled by Bloomberg. It also owns London’s Harrods Department Store Co. Mubadala has a stake in Fiat SpA’s Ferrari SpA.
Abu Dhabi’s Aabar Investments PJSC is the largest shareholder in Daimler AG, the maker of Mercedes-Benz cars, with a 9.08 percent stake, according to data compiled by Bloomberg. Second-largest is Kuwait Investment Authority, with 6.89 percent of the Stuttgart, Germany-based automaker.
SAIC Motor Corp. Ltd. may also buy some stock in GM. The Shanghai-based automaker is one of GM’s partners in China. The Treasury Department is willing to sell the company at most 1 percent of GM, two people said.
Sales Tide
GM is still planning a November IPO, said the people. The company has not committed to a date and may delay if demand for shares were to falter.
Even in a tough market, GM’s IPO should generate plenty of interest, said David Whiston, equity analyst with Morningstar Inc., a Chicago-based investment research firm. Auto sales in the U.S. appear to have bottomed out around 11.5 million vehicles a year. Any rise in the car market bodes well for GM stock, he said.
September sales rose to an annual rate of 11.8 million, the highest since the federal “cash for clunkers” incentives ended in August 2009, according to Autodata Corp.
“If you take the thesis that selling 11.5 million vehicles is way too low, of course GM will be minting money,” Whiston said. “This is a blue-chip company. There will be tons of interest from overseas investment companies.”
Source: bloomberg.net
Petrobras Represents 80% of Brazil Sovereign Fund, Estado Says
Petroleo Brasileiro SA shares account for 80 percent of assets in Brazil’s sovereign wealth fund after the state-controlled company’s $70 billion stock offering last month, O Estado de S. Paulo reported.
Of the fund’s 18 billion reais ($10.8 billion), 90 percent is invested in shares of state companies such as Petrobras, as the oil producer is known, Sao Paulo-based Estado said, citing data from the country’s securities regulator, known as CVM.
The investment signals the fund, created in 2008, may not buy dollars to contain the appreciation of the real after the government said last month it may be used to buy U.S. currency in the foreign-exchange market, Estado said. Treasury Secretary Arno Augustin said yesterday the fund hasn’t yet bought dollars.
Petrobras preferred shares have fallen 3 percent since the Sept. 23 share sale. The real has strengthened 3.4 percent in the same period.
To contact the reporter on this story: Alexander Cuadros in Sao Paulo at acuadros@bloomberg.net
Source: www.bloomberg.com
Of the fund’s 18 billion reais ($10.8 billion), 90 percent is invested in shares of state companies such as Petrobras, as the oil producer is known, Sao Paulo-based Estado said, citing data from the country’s securities regulator, known as CVM.
The investment signals the fund, created in 2008, may not buy dollars to contain the appreciation of the real after the government said last month it may be used to buy U.S. currency in the foreign-exchange market, Estado said. Treasury Secretary Arno Augustin said yesterday the fund hasn’t yet bought dollars.
Petrobras preferred shares have fallen 3 percent since the Sept. 23 share sale. The real has strengthened 3.4 percent in the same period.
To contact the reporter on this story: Alexander Cuadros in Sao Paulo at acuadros@bloomberg.net
Source: www.bloomberg.com
ANALYSIS-Frontier investors seek lift from wealth funds
* Frontier economies to set up sovereign wealth funds
* Aim is to manage revenues more efficiently, cut corruption
* May also aid sovereign ratings, encourage investor flows
By Carolyn Cohn
LONDON, Oct 11 (Reuters) - Investors are eyeing a new crop of sovereign wealth funds they hope will manage revenues in frontier economies more efficiently, avoiding past pitfalls of high costs and corruption and boosting inflows and country ratings.
At least nine frontier market countries in Africa, the Middle East and Asia, from Angola to Bangladesh to Nigeria, are looking at the possibility of setting up a sovereign wealth fund.
In addition to managing wealth for future generations, sovereign wealth funds are also designed as part of broader efforts to reduce corruption and run economies more profitably.
It's an attractive proposition for countries where investors are often deterred by concerns about mismanagement.
"It's a great idea, it implies a certain discipline," said Plamen Monovski, chief investment officer of Renaissance Asset Managers, which has launched two new Africa-focused funds.
Monovski pointed to the example of Russia, which successfully used its sovereign wealth fund to help domestic companies avoid the worst of the financial crisis.
FALTERING FRONTIERS
Although many frontier markets are enjoying some of the highest growth rates in the world, they are failing to benefit from the same levels of liquidity and investor interest as before the global recession.
Nigeria's stock exchange is seeing volume of $20 million daily, compared with $30-50 million before the crisis.
Among frontier nations, Nigeria is probably closest to setting up a sovereign wealth fund to manage its oil revenues, with a bill sent to parliament in September to create the fund with $1 billion in seed capital.
The fund will have three parts: inter-generational savings, a stabilisation fund to provide more immediate budget support, and an infrastructure fund for co-investment with other investors.
The country's credentials are not great. The precursor to the sovereign fund, the Excess Crude Account (ECA), saw its assets diminish to less than $500 million, from $20 billion in 2007.
"The ECA was not protected against different claims from different parties. Both the federal government and the local state governments had claims," said Christian Esters, director, sovereign ratings, at Standard & Poor's in Frankfurt.
But Nigeria's next shot may have a better chance.
"SWFs are a buffer against fiscal shocks that allow a government to follow counter-fiscal policies. That is a positive for a rating," Esters said.
Nigeria has a sub-investment grade B+ rating from S&P.
Fitch, which rates Nigeria at BB-, is more downbeat, telling a seminar this week that if Nigeria did not succeed in introducing a fiscal buffer such as a sovereign wealth fund, it would be a key negative for the rating.
DEVIL IN THE DETAIL
A sovereign wealth fund is designed to protect assets from squandering but has to be managed within a solid framework with clear objectives for that to be effective. "It makes sense to save some of the inflows for future generations, based on best practice in places like China, Norway, Singapore," said Graham Stock, chief strategist at frontier fund manager Insparo Asset Management.
"It can be done well, but the devil is in the detail. You need good rules for what goes in and for what comes out."
Many frontier economies that are planning to establish SWFs are fighting poor rankings in corporate governance indices.
Nigeria and Bangladesh come joint 130th out of 180 countries in Transparency International's 2009 corruption perceptions index and Angola comes 162nd, in a table topped by New Zealand.
Angola is also in the bottom 10th percentile of the World Bank's worldwide governance indicators for control of corruption.
"A number of countries have established SWFs only to squander and liquidate the resources that have been set aside under short-term political pressures," wrote Edwin Truman of the Peterson Institute for International Economics in his latest book, 'Sovereign Wealth Funds: Threat or Salvation?'.
Truman cited Chad and Papua New Guinea, whose SWFs have been wound down.
Frontier economies are taking advice from multilateral agencies like the International Monetary Fund, or established sovereign wealth funds in Norway, Singapore or the Middle East, in an attempt to avoid past problems.
"The questions are similar, the issues are very similar. We need to address those issues of savings investments, how much we put aside for the future, what should we take into consideration," Louis Kasekende, deputy governor of Uganda's central bank, told Reuters.
"I don't know the answer, I'm asking the questions. We must be ready to learn from the others."
(Additional reporting by Natsuko Waki; Editing by John Stonestreet)
Source: af.reuters.com
It’s the Money, Stupid
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, is the only significant public official on record in opposition to the easy-money, zero-interest-rate monetary policy being pursued by Fed chairman Ben Bernanke. So there were multiple layers of irony when Hoenig journeyed to Lenexa, Kansas, on September 23 to deliver a dinner speech to the Hope for America Coalition, a local affiliate of the Tea Party movement.
According to Bloomberg Business Week, a Kansas-based Tea Party leader named Steve Shute praised Hoenig for his willingness to go “toe-to-toe with Ben Bernanke and the Boston-New York-Washington-San Francisco elite axis at the Fed.” He added that most members of that day’s dinner audience “believe the Federal Reserve should be abolished,” on the ground that it is “helping to destroy the country.”
Two days earlier, at the most recent meeting in Washington of the Federal Open Market Committee (FOMC), Hoenig had cast his vote against Bernanke’s latest easy-money scheme, which sets the stage for another round of “quantitative easing,” a reflection in turn of the fact that for almost two years, the short-term interest rate target controlled by the FOMC has been as low as it could possibly be, yet the U.S. economy is still stagnant.
It was Hoenig’s sixth consecutive FOMC meeting at which he cast the only vote against Bernanke’s policy. But the December FOMC meeting will be the last of his long career. He then rotates off the FOMC and in September 2011 reaches the mandatory retirement age of 65, so Team Bernanke can expect to face even less questioning of its policy—particularly given the current complacent state of the Republican party.
At the moment, Republican leaders and policy elites are advancing exclusively fiscal solutions that address only the government response to the economic crisis and not the crisis itself. Fiscal deficits did not create the crisis, and reducing deficits won’t put our economy on a stable footing. From its inception in 2007 right up to the present, the crisis derived from the interaction between excessive investment leverage and dysfunctional interest-rate policy—in other words, a predominantly monetary phenomenon, albeit one that has had grave fiscal consequences.
As long as the GOP enjoys the luxury of being the only alternative to Barack Obama and the Democrats, the party is understandably reluctant to delve into the murky depths of monetary policy. But after November 2, the Republicans’ role will change. They could do worse than pay attention to the only public official, elected or unelected, who is speaking out against current monetary policy, telling anyone who will listen—including an increasingly impatient Tea Party movement—that the root of the crisis is monetary.
Shortly after the fifth of his six “No” votes at the FOMC meeting of August 10, Hoenig delivered a speech in Lincoln, Nebraska, that explains in considerable detail the thinking behind his stubborn and lonely dissents. He recalls being on the FOMC in the third quarter of 2003, when (with strong urging from the most influential new George W. Bush appointee, governor Ben Bernanke) the Alan Greenspan Fed cut short-term interest rates to 1 percent—during a quarter, it turned out, when the economy was growing at nearly a 7 percent annual rate. The Fed then left rates at 1 percent for several months, even after it had become evident that the economy was taking off in the wake of the 2003 Bush tax cuts. This excessive loosening, Hoenig argues, allowed credit to explode and “set the stage for one of the worst economic crises since the Great Depression.”
Hoenig also believes that a milder but similar overeasing by the Green-span FOMC triggered significant dislocation a decade earlier, in the 1990s. In his review of the ominously escalating pattern in the financial crises as well as in Fed policy responses, Hoenig raises the possibility that the worst train wreck of the dying paper-dollar system may still lie ahead. Summoning his strongest language to date, Hoenig condemns as a “dangerous gamble” the Bernanke FOMC’s decision to pursue a zero-interest-rate target for months, perhaps even years beyond its appropriate time. If zero interest rates constitute a dangerous gamble, the Fed’s ongoing public campaign for additional quantitative easing must have him terrified.
It’s not that no one has noticed the policy shipwreck. But Bernanke has remained immune to criticism even from conservative inflation hawks because they can’t articulate what they would have done differently. Substantive criticism needs to extend beyond Bernanke and dissect the nature of the paper monetary system. Conservatives’ inability to offer a systemic critique, despite the fact that the paper standard is in the process of breaking down, shows the extent to which the right has been coopted by the idea that the monetary authorities should micromanage the economy.
In a sense this is not surprising, since it was the iconic Milton Friedman who helped convince Richard Nixon to suspend gold convertibility and float the dollar on August 15, 1971, leaving the Fed with full discretion to intervene in the economy to smooth out business cycles. Friedman deserves enormous credit for bringing the conservative movement and even many nonconservatives to embrace free-market theory, especially deregulation, at a time when it wasn’t in vogue. But unfortunately his long shadow extends to include his quasi-Keynesian belief that the Fed should engage in economic planning.
The awkward truth is that conservatives have grown to rely on the Fed to right the economy in a recession. After all, monetary fine-tuning can soften the blows of economic turbulence. For two decades, Republicans cheered on one of their own, Alan Greenspan, in this endeavor. President George H.W. Bush even begged Greenspan (unsuccessfully) to further cut interest rates as the economy pulled out of the 1990-91 recession.
But this dependence on monetary policy to smooth out the business cycle has proven short-sighted. Easing the downside of recessions comes with a huge cost—the pileup of debt, which opens the door to riskier financial behavior and more traumatic crises. Consider the year Hoenig singled out, 2003, when the Fed brought the Fed funds rate down to 1 percent on its exaggerated fear of deflation. The housing bubble that grew out of this easy-money policy burst with consequences no one from Greenspan on down ever imagined. And the Fed is still trying to figure out how the economy will emerge from that catastrophe.
Unfortunately for would-be incrementalists, there is no viable way to maintain the Fed’s current role as guarantor of short-term financial stability and still reform the paper money system so as to remove its tendency toward the unsustainable accumulation of debt. For the paper money system that the Fed manages not only encourages debt, the system is debt. A newly issued dollar is in fact a form of government-issued debt whose only value comes from its mandated ability to pay off existing dollar-denominated debts. In this system, more debt will always be the painless short-term cure for the general problem of overindebtedness, even though more debt is an insane long-run response to the problem of too much debt.
The self-perpetuating feature that has kept this perverse system alive is the dollar’s position as the world’s reserve currency. Before the dollar assumed this role between the two world wars, gold—something of independent value and no particular country’s liability—was used to settle international payments between central banks and composed their primary reserve asset. But with the dollar performing those functions, its oversupply has often been absorbed abroad. So Bernanke and his predecessors in the paper-dollar era have been able to print a lot of new dollars, over time inevitably driving down the global value of the dollar, without necessarily generating domestic inflation. That is the enabler of, among other things, relatively painless federal budget deficits. For a red-ink-hemorrhaging Greece or California, the specter of default is always on or near the table. For Bernanke and Congress, colossal deficits are just another day at the office.
Republicans, far from broaching this unwelcome subject, have correctly concluded they need say little new to achieve a huge comeback in Congress, given the electorate’s mounting dislike of Obama’s European-style paternalistic elitism. The challenge (and danger) for Republicans will come after the November election, particularly if they regain control of one or both houses of Congress and find themselves in need of a legislative agenda to send, or attempt to send, to the desk of President Obama for his signature or veto.
By focusing solely on fiscal policy Republicans are setting themselves an impossible task. They don’t seem to have grasped the extent to which our debt-driven monetary system enables (and therefore encourages) irresponsible fiscal policy. As was true under President George W. Bush, Republicans will be operating in a monetary environment that precludes the possibility that the federal government can ever run out of money to spend, which makes it virtually impossible to control spending.
Instead of praying that the Republicans will not fall victim to the same pressures to spend as everyone else who has served in Congress since the dollar was unmoored from gold, we must limit the power of the federal government in a way that is consistent with the reality that most elected officials, most of the time, act out of self-interest rather than in the public interest. As the past four decades have shown, our system of limited government cannot include an institutional printing press that stands ready to absorb any unwanted government issuance of debt.
That the party ostensibly in favor of limited government has left Hoenig, a reformed Keynesian, to sound the alarm is worrisome. To be effective, the Republicans will now need to show the same courage Hoenig is demonstrating by his willingness to attack his longtime central banking colleagues at Tea Party events. This courage will come only once Republicans realize, as Hoenig already does, the dangerous game the Fed is playing: calling into greater and greater question the currency by which economic values are measured and on which our financial security depends.
But embracing Hoenig’s critique of the Fed will not be enough. Republicans must go a step further. The debt-driven global monetary system inadvertently started 39 years ago by Nixon is both opaque and dysfunctional. Not a single official any longer seems to understand it, with the possible exception of one regional Fed president, a 64-year-old man who after receiving his doctorate in economics from Iowa State in 1973 went to work at the Kansas City Fed and has worked there ever since. And even Hoenig, in 2003, voted in favor of the policy that he now rightly criticizes.
Conservatives should take this opportunity to swear off the paper dollar standard and monetary micromanagement for good. This needed catharsis will allow the founding republican principles of limited government and human fallibility to inform our monetary policy. As always, the world is looking to the United States for leadership. If we do not begin to return to the simple, transparent workings of the international gold standard, where the world’s final money once again is something of independent value, the future not just of money but of global capitalism itself is likely to be cast into even greater doubt than we’ve seen so far.
Sean Fieler and Jeffrey Bell are chairman and policy director of the American Principles Project, a Washington-based advocacy group.
According to Bloomberg Business Week, a Kansas-based Tea Party leader named Steve Shute praised Hoenig for his willingness to go “toe-to-toe with Ben Bernanke and the Boston-New York-Washington-San Francisco elite axis at the Fed.” He added that most members of that day’s dinner audience “believe the Federal Reserve should be abolished,” on the ground that it is “helping to destroy the country.”
Two days earlier, at the most recent meeting in Washington of the Federal Open Market Committee (FOMC), Hoenig had cast his vote against Bernanke’s latest easy-money scheme, which sets the stage for another round of “quantitative easing,” a reflection in turn of the fact that for almost two years, the short-term interest rate target controlled by the FOMC has been as low as it could possibly be, yet the U.S. economy is still stagnant.
It was Hoenig’s sixth consecutive FOMC meeting at which he cast the only vote against Bernanke’s policy. But the December FOMC meeting will be the last of his long career. He then rotates off the FOMC and in September 2011 reaches the mandatory retirement age of 65, so Team Bernanke can expect to face even less questioning of its policy—particularly given the current complacent state of the Republican party.
At the moment, Republican leaders and policy elites are advancing exclusively fiscal solutions that address only the government response to the economic crisis and not the crisis itself. Fiscal deficits did not create the crisis, and reducing deficits won’t put our economy on a stable footing. From its inception in 2007 right up to the present, the crisis derived from the interaction between excessive investment leverage and dysfunctional interest-rate policy—in other words, a predominantly monetary phenomenon, albeit one that has had grave fiscal consequences.
As long as the GOP enjoys the luxury of being the only alternative to Barack Obama and the Democrats, the party is understandably reluctant to delve into the murky depths of monetary policy. But after November 2, the Republicans’ role will change. They could do worse than pay attention to the only public official, elected or unelected, who is speaking out against current monetary policy, telling anyone who will listen—including an increasingly impatient Tea Party movement—that the root of the crisis is monetary.
Shortly after the fifth of his six “No” votes at the FOMC meeting of August 10, Hoenig delivered a speech in Lincoln, Nebraska, that explains in considerable detail the thinking behind his stubborn and lonely dissents. He recalls being on the FOMC in the third quarter of 2003, when (with strong urging from the most influential new George W. Bush appointee, governor Ben Bernanke) the Alan Greenspan Fed cut short-term interest rates to 1 percent—during a quarter, it turned out, when the economy was growing at nearly a 7 percent annual rate. The Fed then left rates at 1 percent for several months, even after it had become evident that the economy was taking off in the wake of the 2003 Bush tax cuts. This excessive loosening, Hoenig argues, allowed credit to explode and “set the stage for one of the worst economic crises since the Great Depression.”
Hoenig also believes that a milder but similar overeasing by the Green-span FOMC triggered significant dislocation a decade earlier, in the 1990s. In his review of the ominously escalating pattern in the financial crises as well as in Fed policy responses, Hoenig raises the possibility that the worst train wreck of the dying paper-dollar system may still lie ahead. Summoning his strongest language to date, Hoenig condemns as a “dangerous gamble” the Bernanke FOMC’s decision to pursue a zero-interest-rate target for months, perhaps even years beyond its appropriate time. If zero interest rates constitute a dangerous gamble, the Fed’s ongoing public campaign for additional quantitative easing must have him terrified.
It’s not that no one has noticed the policy shipwreck. But Bernanke has remained immune to criticism even from conservative inflation hawks because they can’t articulate what they would have done differently. Substantive criticism needs to extend beyond Bernanke and dissect the nature of the paper monetary system. Conservatives’ inability to offer a systemic critique, despite the fact that the paper standard is in the process of breaking down, shows the extent to which the right has been coopted by the idea that the monetary authorities should micromanage the economy.
In a sense this is not surprising, since it was the iconic Milton Friedman who helped convince Richard Nixon to suspend gold convertibility and float the dollar on August 15, 1971, leaving the Fed with full discretion to intervene in the economy to smooth out business cycles. Friedman deserves enormous credit for bringing the conservative movement and even many nonconservatives to embrace free-market theory, especially deregulation, at a time when it wasn’t in vogue. But unfortunately his long shadow extends to include his quasi-Keynesian belief that the Fed should engage in economic planning.
The awkward truth is that conservatives have grown to rely on the Fed to right the economy in a recession. After all, monetary fine-tuning can soften the blows of economic turbulence. For two decades, Republicans cheered on one of their own, Alan Greenspan, in this endeavor. President George H.W. Bush even begged Greenspan (unsuccessfully) to further cut interest rates as the economy pulled out of the 1990-91 recession.
But this dependence on monetary policy to smooth out the business cycle has proven short-sighted. Easing the downside of recessions comes with a huge cost—the pileup of debt, which opens the door to riskier financial behavior and more traumatic crises. Consider the year Hoenig singled out, 2003, when the Fed brought the Fed funds rate down to 1 percent on its exaggerated fear of deflation. The housing bubble that grew out of this easy-money policy burst with consequences no one from Greenspan on down ever imagined. And the Fed is still trying to figure out how the economy will emerge from that catastrophe.
Unfortunately for would-be incrementalists, there is no viable way to maintain the Fed’s current role as guarantor of short-term financial stability and still reform the paper money system so as to remove its tendency toward the unsustainable accumulation of debt. For the paper money system that the Fed manages not only encourages debt, the system is debt. A newly issued dollar is in fact a form of government-issued debt whose only value comes from its mandated ability to pay off existing dollar-denominated debts. In this system, more debt will always be the painless short-term cure for the general problem of overindebtedness, even though more debt is an insane long-run response to the problem of too much debt.
The self-perpetuating feature that has kept this perverse system alive is the dollar’s position as the world’s reserve currency. Before the dollar assumed this role between the two world wars, gold—something of independent value and no particular country’s liability—was used to settle international payments between central banks and composed their primary reserve asset. But with the dollar performing those functions, its oversupply has often been absorbed abroad. So Bernanke and his predecessors in the paper-dollar era have been able to print a lot of new dollars, over time inevitably driving down the global value of the dollar, without necessarily generating domestic inflation. That is the enabler of, among other things, relatively painless federal budget deficits. For a red-ink-hemorrhaging Greece or California, the specter of default is always on or near the table. For Bernanke and Congress, colossal deficits are just another day at the office.
Republicans, far from broaching this unwelcome subject, have correctly concluded they need say little new to achieve a huge comeback in Congress, given the electorate’s mounting dislike of Obama’s European-style paternalistic elitism. The challenge (and danger) for Republicans will come after the November election, particularly if they regain control of one or both houses of Congress and find themselves in need of a legislative agenda to send, or attempt to send, to the desk of President Obama for his signature or veto.
By focusing solely on fiscal policy Republicans are setting themselves an impossible task. They don’t seem to have grasped the extent to which our debt-driven monetary system enables (and therefore encourages) irresponsible fiscal policy. As was true under President George W. Bush, Republicans will be operating in a monetary environment that precludes the possibility that the federal government can ever run out of money to spend, which makes it virtually impossible to control spending.
Instead of praying that the Republicans will not fall victim to the same pressures to spend as everyone else who has served in Congress since the dollar was unmoored from gold, we must limit the power of the federal government in a way that is consistent with the reality that most elected officials, most of the time, act out of self-interest rather than in the public interest. As the past four decades have shown, our system of limited government cannot include an institutional printing press that stands ready to absorb any unwanted government issuance of debt.
That the party ostensibly in favor of limited government has left Hoenig, a reformed Keynesian, to sound the alarm is worrisome. To be effective, the Republicans will now need to show the same courage Hoenig is demonstrating by his willingness to attack his longtime central banking colleagues at Tea Party events. This courage will come only once Republicans realize, as Hoenig already does, the dangerous game the Fed is playing: calling into greater and greater question the currency by which economic values are measured and on which our financial security depends.
But embracing Hoenig’s critique of the Fed will not be enough. Republicans must go a step further. The debt-driven global monetary system inadvertently started 39 years ago by Nixon is both opaque and dysfunctional. Not a single official any longer seems to understand it, with the possible exception of one regional Fed president, a 64-year-old man who after receiving his doctorate in economics from Iowa State in 1973 went to work at the Kansas City Fed and has worked there ever since. And even Hoenig, in 2003, voted in favor of the policy that he now rightly criticizes.
Conservatives should take this opportunity to swear off the paper dollar standard and monetary micromanagement for good. This needed catharsis will allow the founding republican principles of limited government and human fallibility to inform our monetary policy. As always, the world is looking to the United States for leadership. If we do not begin to return to the simple, transparent workings of the international gold standard, where the world’s final money once again is something of independent value, the future not just of money but of global capitalism itself is likely to be cast into even greater doubt than we’ve seen so far.
Sean Fieler and Jeffrey Bell are chairman and policy director of the American Principles Project, a Washington-based advocacy group.
Sunday, October 10, 2010
Malaysia's Khazanah Takes a Different Tack
By PETER STEIN
KUALA LUMPUR, Malaysia—A $30 billion Malaysian state-owned fund is testing the premise that promoting national interests is compatible with making a profit.
Those, in fact, are the twin goals that drive Khazanah Nasional Bhd., the government's investment arm that prides itself on its returns—it says its compound annual growth rate is running around 13% a year, up from 9% at the end of last year—and its ability to seed new industries.
"We like to think you can have the best of both worlds," Azman Mokhtar, Khazanah's managing director, said in a rare interview. "Unabashedly," he said, "we go out and want to create jobs."
Khazanah isn't one of the biggest players on the sovereign-wealth scene, but with a portfolio valued at 92.2 billion ringgit ($29.8 billion) at the end of last year, it still is a giant-sized investor by most standards. Like its bigger, better-known Singaporean counterpart, Temasek Holdings Pte. Ltd., Khazanah is both a fund and a holding company. It owns large swaths of the corporate sector through stakes in the country's airline, its post office, its national car maker and other businesses.
Since he took charge of Khazanah in May 2004, Mr. Mokhtar, now 49 years old, has been shifting out of noncore holdings and investing in new sectors considered strategically important for the future of this Muslim-majority country of 28 million people. Health care, leisure and tourism, technology and sustainable development are among the areas Khazanah targets.
In the universe of sovereign funds, Khazanah's aspirations set it apart from some Asian peers. Temasek likes to consider itself a professional, returns-oriented investment fund that just happens to be state-owned. It is closer in philosophy to Mubadala Development, a development fund run by Abu Dhabi aimed at producing financial returns and "tangible social benefits" for the emirate.
Khazanah's state-backed heft can be controversial when it is wielded against private-sector players. When upstart budget carrier AirAsia Bhd. wanted to build a new airport to accommodate its burgeoning traffic and avoid high landing fees at Kuala Lumpur International Airport, it met opposition from Khazanah, the biggest investor in both Malaysia Airports Bhd., the company that runs KLIA, and Malaysia Airlines. The government brokered a compromise under which Malaysia Airports is building a new budget terminal for AirAsia's use near KLIA, with AirAsia participating in the design.
The fund's footprint outside Malaysia is fairly modest. About 20% of Khazanah's assets are overseas, including those held through its portfolio companies, though its ambitions are expanding.
In July, Khazanah made its splashiest move yet abroad by agreeing to pay $2.6 billion for the 76.1% of Singapore hospital-operator Parkway Holdings Ltd. that it didn't already own. The takeover, which forced out fellow shareholder and rival bidder Fortis Healthcare Ltd. of India, was likely the first time a sovereign-wealth fund successfully launched a hostile bid outside its borders.
Hostile, that is, to Fortis. The Indian company, controlled by the Singh family of pharmaceutical giant Ranbaxy Laboratories Ltd., thought it won effective control of Parkway when it took over a 23.9% stake from private-equity firm TPG this past March for 960 million Singapore dollars ($734.7 million).
Parkway, along with its Malaysian affiliate Pantai Group, are attractive for their 15% underlying growth. But two things make this an especially important investment for Khazanah, Mr. Mokhtar said. On the one hand, Malaysia is keen to build up health-care expertise to capitalize on regional demand for high-quality medical services. And it offers a chance to leverage warming ties between Malaysia and Singapore, neighbors with a history of off-and-on political tensions.
The two governments recently signed a deal that largely resolves a land dispute and establishes a joint venture to create health-care facilities in Iskander, a Malaysian district adjacent to Singapore.
"I see this as a confluence of both strategic imperatives [and] commercial imperatives," said Mr. Mokhtar, a former research director for Malaysia at both UBS AG and Salomon Smith Barney. Ties between Malaysia and Singapore, he said, are "a critical bridge that we need to build in order for Asean [the Association of Southeast Asian Nations] businesses to grow and flourish, in order to have scale in this kind of a global competition now with China and India."
Source: online.wsj.com
KUALA LUMPUR, Malaysia—A $30 billion Malaysian state-owned fund is testing the premise that promoting national interests is compatible with making a profit.
Those, in fact, are the twin goals that drive Khazanah Nasional Bhd., the government's investment arm that prides itself on its returns—it says its compound annual growth rate is running around 13% a year, up from 9% at the end of last year—and its ability to seed new industries.
"We like to think you can have the best of both worlds," Azman Mokhtar, Khazanah's managing director, said in a rare interview. "Unabashedly," he said, "we go out and want to create jobs."
Khazanah isn't one of the biggest players on the sovereign-wealth scene, but with a portfolio valued at 92.2 billion ringgit ($29.8 billion) at the end of last year, it still is a giant-sized investor by most standards. Like its bigger, better-known Singaporean counterpart, Temasek Holdings Pte. Ltd., Khazanah is both a fund and a holding company. It owns large swaths of the corporate sector through stakes in the country's airline, its post office, its national car maker and other businesses.
Since he took charge of Khazanah in May 2004, Mr. Mokhtar, now 49 years old, has been shifting out of noncore holdings and investing in new sectors considered strategically important for the future of this Muslim-majority country of 28 million people. Health care, leisure and tourism, technology and sustainable development are among the areas Khazanah targets.
In the universe of sovereign funds, Khazanah's aspirations set it apart from some Asian peers. Temasek likes to consider itself a professional, returns-oriented investment fund that just happens to be state-owned. It is closer in philosophy to Mubadala Development, a development fund run by Abu Dhabi aimed at producing financial returns and "tangible social benefits" for the emirate.
Khazanah's state-backed heft can be controversial when it is wielded against private-sector players. When upstart budget carrier AirAsia Bhd. wanted to build a new airport to accommodate its burgeoning traffic and avoid high landing fees at Kuala Lumpur International Airport, it met opposition from Khazanah, the biggest investor in both Malaysia Airports Bhd., the company that runs KLIA, and Malaysia Airlines. The government brokered a compromise under which Malaysia Airports is building a new budget terminal for AirAsia's use near KLIA, with AirAsia participating in the design.
The fund's footprint outside Malaysia is fairly modest. About 20% of Khazanah's assets are overseas, including those held through its portfolio companies, though its ambitions are expanding.
In July, Khazanah made its splashiest move yet abroad by agreeing to pay $2.6 billion for the 76.1% of Singapore hospital-operator Parkway Holdings Ltd. that it didn't already own. The takeover, which forced out fellow shareholder and rival bidder Fortis Healthcare Ltd. of India, was likely the first time a sovereign-wealth fund successfully launched a hostile bid outside its borders.
Hostile, that is, to Fortis. The Indian company, controlled by the Singh family of pharmaceutical giant Ranbaxy Laboratories Ltd., thought it won effective control of Parkway when it took over a 23.9% stake from private-equity firm TPG this past March for 960 million Singapore dollars ($734.7 million).
Parkway, along with its Malaysian affiliate Pantai Group, are attractive for their 15% underlying growth. But two things make this an especially important investment for Khazanah, Mr. Mokhtar said. On the one hand, Malaysia is keen to build up health-care expertise to capitalize on regional demand for high-quality medical services. And it offers a chance to leverage warming ties between Malaysia and Singapore, neighbors with a history of off-and-on political tensions.
The two governments recently signed a deal that largely resolves a land dispute and establishes a joint venture to create health-care facilities in Iskander, a Malaysian district adjacent to Singapore.
"I see this as a confluence of both strategic imperatives [and] commercial imperatives," said Mr. Mokhtar, a former research director for Malaysia at both UBS AG and Salomon Smith Barney. Ties between Malaysia and Singapore, he said, are "a critical bridge that we need to build in order for Asean [the Association of Southeast Asian Nations] businesses to grow and flourish, in order to have scale in this kind of a global competition now with China and India."
Source: online.wsj.com
Kuwait sovereign wealth fund did not get offer for Zain stake
By Summer Said, Dow Jones Newswires
Monday 11 October 2010
Fund's MD tells local TV station its stake in Zain is not part of Etisalat bid.
Kuwait's sovereign wealth fund didn't receive an offer for its stake in Mobile Telecommunications Co., known as Zain, Al Arabiya television reported Saturday, citing the fund's managing director .
Kuwait Investment Authority's stake in the telecom firm isn't part of an offer by Emirates Telecommunications Corp., or Etisalat, to buy 46% of Zain, Bader al-Saad told the Dubai-based channel.
KIA, however, supports the possible deal which will boost the country's stock exchange, he said.
The fund, which is mainly, targeting emerging markets in Asia, had recently offered to invest $1 billion during the initial public offering of AIA Group, he added.
Monday 11 October 2010
Fund's MD tells local TV station its stake in Zain is not part of Etisalat bid.
Kuwait's sovereign wealth fund didn't receive an offer for its stake in Mobile Telecommunications Co., known as Zain, Al Arabiya television reported Saturday, citing the fund's managing director .
Kuwait Investment Authority's stake in the telecom firm isn't part of an offer by Emirates Telecommunications Corp., or Etisalat, to buy 46% of Zain, Bader al-Saad told the Dubai-based channel.
KIA, however, supports the possible deal which will boost the country's stock exchange, he said.
The fund, which is mainly, targeting emerging markets in Asia, had recently offered to invest $1 billion during the initial public offering of AIA Group, he added.
Saturday, October 9, 2010
Kuwait Sovereign Wealth Fund Didn’t Get Offer for Zain Stake
By Inal Ersan
Oct. 9 (Bloomberg) -- Kuwait’s sovereign wealth fund did not receive an offer for its stake in Mobile Telecommunications Co., known as Zain, Managing Director Bader al-Saad said in remarks to Al Arabiya television aired today.
Al-Saad said the fund supports the possible deal in which Emirates Telecommunications Corp., known as Estisalt, offered to buy 46% of Zain and said the deal would be a boost to the Kuwaiti stock market. He declined to comment on the price offered by Etisalat. The fund, the Kuwait Investment Authority, holds 24.6 percent in Zain according to Bloomberg data.
Source: www.businessweek.com
Oct. 9 (Bloomberg) -- Kuwait’s sovereign wealth fund did not receive an offer for its stake in Mobile Telecommunications Co., known as Zain, Managing Director Bader al-Saad said in remarks to Al Arabiya television aired today.
Al-Saad said the fund supports the possible deal in which Emirates Telecommunications Corp., known as Estisalt, offered to buy 46% of Zain and said the deal would be a boost to the Kuwaiti stock market. He declined to comment on the price offered by Etisalat. The fund, the Kuwait Investment Authority, holds 24.6 percent in Zain according to Bloomberg data.
Source: www.businessweek.com
Wednesday, October 6, 2010
Japan Stimulus Plan Proposes Japan Sovereign Fund
By Takashi Nakamichi
Of DOW JONES NEWSWIRES
TOKYO (Dow Jones)--Japan's ruling party unveiled an economic stimulus plan Wednesday that calls for Japan to consider making use of its $1.07 trillion in foreign reserves to create a sovereign wealth fund.
In doing so, Japan would join other large foreign currency reserve countries such as the UAE, Russia and China, but would be the first G-7 economy to take such a step. A Japanese sovereign wealth fund has been contemplated in the past, but has always been rejected.
In explaining the reasons for such a move, the plan's chief architect, former trade minister Masayuki Naoshima pointed to the need to get a greater return on Japan's overseas investments. "We are thinking of how we can better employ Japan's foreign reserves," he told reporters late Wednesday.
The proposal is included in a more than Y4.8 trillion package put together by Naoshima and other lawmakers within the ruling Democratic Party of Japan. Other measures include employment support, regional infrastructure projects and steps to reduce the country's dependence on so-called rare earth metals imported mainly from China.
The stimulus is part of a concerted effort by the government and Bank of Japan to keep the economy from sinking back into recession. The government is also taking action to lower the value of the yen while the central bank Tuesday unveiled a ground-breaking program designed to pump more money into the economy.
Since the DPJ controls the lower house of the Diet, the more powerful chamber of Japan's parliament, the package is expected to be backed by the government. But the prospects for the fund remain doubtful due to a number of potential hurdles.
The most stringent opposition is expected to come from the powerful Ministry of Finance, which effectively killed off a similar proposal in 2008. The ministry is said to be concerned that any wealth fund-style investments would be too risky a use of taxpayers money.
The timing is also less than opportune since the funds would likely need to be diversified out of the dollar, at a time when Japan is trying to support the U.S. currency to hold back a rising yen that hurts exports. It has said that selling dollars would "destabilize" the currency market.
Naoshima said that selling U.S. Treasurys, where Japan currently puts the lion's share of its foreign investments, was not on the cards. "I am not thinking about selling U.S. Treasury bonds," he said.
He also said that the idea of a fund was in its early stages, saying "(we) need to discuss the issue with the government and especially with the Ministry of Finance, which we haven't been able to reach an agreement with."
Analysts also doubt that the government will do anything radical with the reserves. Shifting reserves away from the dollar could fuel its downtrend versus the yen, dealing a blow to an export-reliant economy already reeling from the yen's continued strength.
Osamu Takashima, chief currency strategist at Citigroup in Tokyo, said lawmakers were using the proposal to "show off" to voters that they are aware of the trend in which developing nations such as China use national wealth funds to earn higher returns on their reserves. "It's hard to imagine that the Japanese government will sell U.S. Treasury bonds," he said.
Another key part of the package is meant to reduce Japan's dependence on potentially problematic suppliers such as China for "rare earth" minerals and other natural resources.
Indications that China was unofficially blocking such exports after the two nations squared off in a territorial dispute had worried big Japanese manufacturers. The Chinese government denied limiting exports, but the episode highlighted the importance of the materials for products such as environmental technology where Japan is a major exporter.
The DPJ is also calling on the government to use the reserves of its state-affiliated Japan Bank for International Cooperation to make investments overseas to help Japan secure natural resources, the Nikkei newspaper reported on Wednesday.
Of DOW JONES NEWSWIRES
TOKYO (Dow Jones)--Japan's ruling party unveiled an economic stimulus plan Wednesday that calls for Japan to consider making use of its $1.07 trillion in foreign reserves to create a sovereign wealth fund.
In doing so, Japan would join other large foreign currency reserve countries such as the UAE, Russia and China, but would be the first G-7 economy to take such a step. A Japanese sovereign wealth fund has been contemplated in the past, but has always been rejected.
In explaining the reasons for such a move, the plan's chief architect, former trade minister Masayuki Naoshima pointed to the need to get a greater return on Japan's overseas investments. "We are thinking of how we can better employ Japan's foreign reserves," he told reporters late Wednesday.
The proposal is included in a more than Y4.8 trillion package put together by Naoshima and other lawmakers within the ruling Democratic Party of Japan. Other measures include employment support, regional infrastructure projects and steps to reduce the country's dependence on so-called rare earth metals imported mainly from China.
The stimulus is part of a concerted effort by the government and Bank of Japan to keep the economy from sinking back into recession. The government is also taking action to lower the value of the yen while the central bank Tuesday unveiled a ground-breaking program designed to pump more money into the economy.
Since the DPJ controls the lower house of the Diet, the more powerful chamber of Japan's parliament, the package is expected to be backed by the government. But the prospects for the fund remain doubtful due to a number of potential hurdles.
The most stringent opposition is expected to come from the powerful Ministry of Finance, which effectively killed off a similar proposal in 2008. The ministry is said to be concerned that any wealth fund-style investments would be too risky a use of taxpayers money.
The timing is also less than opportune since the funds would likely need to be diversified out of the dollar, at a time when Japan is trying to support the U.S. currency to hold back a rising yen that hurts exports. It has said that selling dollars would "destabilize" the currency market.
Naoshima said that selling U.S. Treasurys, where Japan currently puts the lion's share of its foreign investments, was not on the cards. "I am not thinking about selling U.S. Treasury bonds," he said.
He also said that the idea of a fund was in its early stages, saying "(we) need to discuss the issue with the government and especially with the Ministry of Finance, which we haven't been able to reach an agreement with."
Analysts also doubt that the government will do anything radical with the reserves. Shifting reserves away from the dollar could fuel its downtrend versus the yen, dealing a blow to an export-reliant economy already reeling from the yen's continued strength.
Osamu Takashima, chief currency strategist at Citigroup in Tokyo, said lawmakers were using the proposal to "show off" to voters that they are aware of the trend in which developing nations such as China use national wealth funds to earn higher returns on their reserves. "It's hard to imagine that the Japanese government will sell U.S. Treasury bonds," he said.
Another key part of the package is meant to reduce Japan's dependence on potentially problematic suppliers such as China for "rare earth" minerals and other natural resources.
Indications that China was unofficially blocking such exports after the two nations squared off in a territorial dispute had worried big Japanese manufacturers. The Chinese government denied limiting exports, but the episode highlighted the importance of the materials for products such as environmental technology where Japan is a major exporter.
The DPJ is also calling on the government to use the reserves of its state-affiliated Japan Bank for International Cooperation to make investments overseas to help Japan secure natural resources, the Nikkei newspaper reported on Wednesday.
Monday, October 4, 2010
Global M&A involving sovereign wealth funds fall in Q3
(Reuters) - Global corporate mergers and acquisitions activity involving sovereign wealth funds fell in the third quarter to $9.2 billion with 24 deals completed, Thomson Reuters data showed on Monday.
Global announced M&A volumes involving state investment vehicles fell 46 percent in the three months ending September from the same period in 2009. In the second quarter of 2010, such volumes totaled $12.5 billion with 37 deals completed.
At the height of the boom in the first quarter of 2006, sovereign wealth funds sealed 35 deals worth $45.7 billion.
After a poor performance during the financial crisis, many sovereign wealth funds have shifted their focus away from aggressive investment abroad and instead put money into assets at home or into "strategic" foreign assets, such as food and energy, that fit in with national economic policy.
Over the past year they also have been expanding their portfolio in emerging and frontier markets, where some of them have invested in long-term infrastructure or resource projects.
(Reporting by Natsuko Waki)
Source: www.reuters.com
Global announced M&A volumes involving state investment vehicles fell 46 percent in the three months ending September from the same period in 2009. In the second quarter of 2010, such volumes totaled $12.5 billion with 37 deals completed.
At the height of the boom in the first quarter of 2006, sovereign wealth funds sealed 35 deals worth $45.7 billion.
After a poor performance during the financial crisis, many sovereign wealth funds have shifted their focus away from aggressive investment abroad and instead put money into assets at home or into "strategic" foreign assets, such as food and energy, that fit in with national economic policy.
Over the past year they also have been expanding their portfolio in emerging and frontier markets, where some of them have invested in long-term infrastructure or resource projects.
(Reporting by Natsuko Waki)
Source: www.reuters.com
Friday, October 1, 2010
Corporate Finance: Sovereign Wealth Funds Prepare To Take More Active Role In M&A
By Gordon Platt
Global Finance Magazine
1 October 2009
Sovereign wealth funds could play a big supporting role as global mergers and acquisitions try to get back on track following a dramatic slowdown in M&A activity during the credit crisis and global recession. While they are not about to become swashbuckling barbarians at corporate gates, SWFs are joining together in “clubs” to cooperate on strategic investments and takeovers.
Qatar Holding, the investment arm of Qatar Investment Authority, joined China’s SWF, China Investment Corporation (CIC), in late August to purchase a $448 million issue of preference shares in UK-based property firm Songbird Estates, the owner of much of London’s Canary Wharf. Qatar aims to become the largest shareholder in Songbird.
“This transaction represents an important step in our drive to build up a diversified portfolio globally of the highest-quality assets across a broad spectrum of asset classes,” Ahmad Al-Sayed, CEO of Qatar Holding, said in a statement.
In June, SWFs from China, Kuwait and Singapore emerged as the deep-pocket backers who enabled BlackRock’s acquisition of Barclays Global Investors for about $13.5 billion. SWFs are increasingly working together to achieve their commercial objectives, according to a survey released in July by UK-based University of Oxford. The operations and strategies of SWFs remain, in many cases, guarded secrets, it said.
China’s foreign exchange reserves have passed $2.1 trillion, and CIC could seek more capital to deploy in lower-cost acquisitions in the wake of the global financial crisis. As central banks amass reserves that are more than sufficient to meet their near-term needs, they are seeking higher returns than are available on US treasury securities.
Second-Quarter Rebound
Global corporate M&A activity involving SWFs rebounded sharply in the second quarter of 2009 to more than $3.6 billion after falling to $1 billion in the first quarter, according to Thomson Reuters. However, the total remained well below the $19 billion recorded in the fourth quarter of 2008. SWFs’ financial investments in troubled US financial services firms were welcomed at the height of the crisis, but issues of disclosure and intent could become more controversial as M&A activity accelerates and broadens in the future.
“From the times when kings invested in building pyramids, raising armies and bankrolling explorers, sovereign wealth attracted political controversy,” says Alexander Mirtchev, president of Krull, an advisory and project management firm based in Washington, DC. “But sovereigns have changed with the times and today represent internationally legitimate public authorities,” according to Mirtchev, who is an independent director of Kazakhstan’s SWF, Samruk-Kazyna.
“Cooperation among SWFs and their managers on different projects represents a sign of their maturity as investors who have become more aware of the market opportunities,” Mirtchev says. “On certain occasions, it could help funds to become market leaders in specific sectors,” he says.
The primary advantage of forming clubs is to spread the risk while increasing potential profits, Mirtchev says. Meanwhile, the co-financing is welcome at a time when lack of financing is the biggest impediment to dealmaking.
Perceptions Change
The investment and political environment in which SWFs are operating has changed dramatically as a result of the global financial crisis, according to a report released in August by State Street, Boston-based provider of financial services to institutional investors. “The unprecedented events within the financial marketplace have significantly changed both the public perception of sovereign wealth funds and the way the funds perceive their own role as very large institutional investors,” says Jay Hooley, president and chief operating officer of State Street. SWFs are facing sizable challenges and opportunities, he says.
The post-crisis reality has created an excellent basis upon which SWFs and the rest of the global financial community can further their cooperation and forge a mutually beneficial coexistence, the State Street report says. “Given the vast pool of assets they represent, SWFs will be important participants in shaping the future of global finance,” it says.
With nearly $3 trillion in financial resources, SWFs are playing a growing role as cross-border investors, and this has provoked considerable debate across the industrialized world, according to State Street. “The rapid growth of these funds, and their status as sovereign-owned asset pools that are neither pension funds nor traditional reserve assets, has ignited a spirited discussion about their governance, accountability and transparency, as well as the appropriateness of government control in investment decision-making,” it says. “These funds raise many issues of international economic policy, but critical to maintaining global prosperity and market efficiencies is maintaining the openness of host and recipient economies and financial systems to cross-border trade and investment,” the report says.
Best Practices Evolve
The International Monetary Fund and the Organization for Economic Cooperation and Development are examining these issues and are developing voluntary best practices for both SWFs and the countries receiving their investments. By providing liquidity and capital to world markets, SWFs can enhance the operation of markets, lower equity financing costs and provide support to equity valuations, State Street says.
Much of last year’s deal activity in the financial services sector involved SWFs taking minority interests in banks seeking capital injections. However, the appetite of SWFs to invest in the US banking sector has diminished significantly because of losses taken on the investments made in 2007 and early 2008, according to a report by PricewaterhouseCoopers. Inbound deal activity in the US financial services industry is likely to come from the stronger Asian strategic buyers, while the European financial services companies continue to focus on addressing their own issues, it says.
The largest M&A deal worldwide in August was the Qatar Investment Authority’s purchase of an additional 17% stake in Volkswagen, and Qatar Holding’s concurrent purchase of a 10% stake in Porsche. The transactions had a combined ranked value of $9.6 billion, according to Thomson Reuters. As a result of the deal, Porsche will set up research and development and testing facilities in Qatar.
Abu Dhabi’s state-owned investment fund, Advanced Technology Investment Company (ATIC), became a major participant in the global microchip industry on September 7 with its cash purchase of Singapore-based Chartered Semiconductor Manufacturing for $1.8 billion. Chartered’s largest shareholder was Temasek Holdings, an investment company owned by the government of Singapore. ATIC is also the main shareholder in Globalfoundries, a US-based joint venture with Advanced Micro Devices. Globalfoundries and Chartered together will create a manufacturer of next-generation chips that will be big enough to compete with Taiwan’s customized chipmakers, which now control about two-thirds of the global contract chip market. Doug Grose, CEO of Globalfoundries, will run the combined operations with Chartered, which makes chips that run the Microsoft Xbox 360 game consoles. ATIC will assume $3.1 billion in debt and covertible shares of Chartered, which posted a loss of $39 million in the second quarter, its fourth quarterly loss in a row.
On a purely portfolio risk management basis, there are legitimate grounds for asset-rich countries to seek real assets through SWFs, according to State Street. These countries holding large foreign exchange reserves need to avoid the risk that official-sector debtors from the industrialized countries will seek to reduce their nominal liabilities through a policy of inflation, it says.
Global Finance Magazine
1 October 2009
Sovereign wealth funds could play a big supporting role as global mergers and acquisitions try to get back on track following a dramatic slowdown in M&A activity during the credit crisis and global recession. While they are not about to become swashbuckling barbarians at corporate gates, SWFs are joining together in “clubs” to cooperate on strategic investments and takeovers.
Qatar Holding, the investment arm of Qatar Investment Authority, joined China’s SWF, China Investment Corporation (CIC), in late August to purchase a $448 million issue of preference shares in UK-based property firm Songbird Estates, the owner of much of London’s Canary Wharf. Qatar aims to become the largest shareholder in Songbird.
“This transaction represents an important step in our drive to build up a diversified portfolio globally of the highest-quality assets across a broad spectrum of asset classes,” Ahmad Al-Sayed, CEO of Qatar Holding, said in a statement.
In June, SWFs from China, Kuwait and Singapore emerged as the deep-pocket backers who enabled BlackRock’s acquisition of Barclays Global Investors for about $13.5 billion. SWFs are increasingly working together to achieve their commercial objectives, according to a survey released in July by UK-based University of Oxford. The operations and strategies of SWFs remain, in many cases, guarded secrets, it said.
China’s foreign exchange reserves have passed $2.1 trillion, and CIC could seek more capital to deploy in lower-cost acquisitions in the wake of the global financial crisis. As central banks amass reserves that are more than sufficient to meet their near-term needs, they are seeking higher returns than are available on US treasury securities.
Second-Quarter Rebound
Global corporate M&A activity involving SWFs rebounded sharply in the second quarter of 2009 to more than $3.6 billion after falling to $1 billion in the first quarter, according to Thomson Reuters. However, the total remained well below the $19 billion recorded in the fourth quarter of 2008. SWFs’ financial investments in troubled US financial services firms were welcomed at the height of the crisis, but issues of disclosure and intent could become more controversial as M&A activity accelerates and broadens in the future.
“From the times when kings invested in building pyramids, raising armies and bankrolling explorers, sovereign wealth attracted political controversy,” says Alexander Mirtchev, president of Krull, an advisory and project management firm based in Washington, DC. “But sovereigns have changed with the times and today represent internationally legitimate public authorities,” according to Mirtchev, who is an independent director of Kazakhstan’s SWF, Samruk-Kazyna.
“Cooperation among SWFs and their managers on different projects represents a sign of their maturity as investors who have become more aware of the market opportunities,” Mirtchev says. “On certain occasions, it could help funds to become market leaders in specific sectors,” he says.
The primary advantage of forming clubs is to spread the risk while increasing potential profits, Mirtchev says. Meanwhile, the co-financing is welcome at a time when lack of financing is the biggest impediment to dealmaking.
Perceptions Change
The investment and political environment in which SWFs are operating has changed dramatically as a result of the global financial crisis, according to a report released in August by State Street, Boston-based provider of financial services to institutional investors. “The unprecedented events within the financial marketplace have significantly changed both the public perception of sovereign wealth funds and the way the funds perceive their own role as very large institutional investors,” says Jay Hooley, president and chief operating officer of State Street. SWFs are facing sizable challenges and opportunities, he says.
The post-crisis reality has created an excellent basis upon which SWFs and the rest of the global financial community can further their cooperation and forge a mutually beneficial coexistence, the State Street report says. “Given the vast pool of assets they represent, SWFs will be important participants in shaping the future of global finance,” it says.
With nearly $3 trillion in financial resources, SWFs are playing a growing role as cross-border investors, and this has provoked considerable debate across the industrialized world, according to State Street. “The rapid growth of these funds, and their status as sovereign-owned asset pools that are neither pension funds nor traditional reserve assets, has ignited a spirited discussion about their governance, accountability and transparency, as well as the appropriateness of government control in investment decision-making,” it says. “These funds raise many issues of international economic policy, but critical to maintaining global prosperity and market efficiencies is maintaining the openness of host and recipient economies and financial systems to cross-border trade and investment,” the report says.
Best Practices Evolve
The International Monetary Fund and the Organization for Economic Cooperation and Development are examining these issues and are developing voluntary best practices for both SWFs and the countries receiving their investments. By providing liquidity and capital to world markets, SWFs can enhance the operation of markets, lower equity financing costs and provide support to equity valuations, State Street says.
Much of last year’s deal activity in the financial services sector involved SWFs taking minority interests in banks seeking capital injections. However, the appetite of SWFs to invest in the US banking sector has diminished significantly because of losses taken on the investments made in 2007 and early 2008, according to a report by PricewaterhouseCoopers. Inbound deal activity in the US financial services industry is likely to come from the stronger Asian strategic buyers, while the European financial services companies continue to focus on addressing their own issues, it says.
The largest M&A deal worldwide in August was the Qatar Investment Authority’s purchase of an additional 17% stake in Volkswagen, and Qatar Holding’s concurrent purchase of a 10% stake in Porsche. The transactions had a combined ranked value of $9.6 billion, according to Thomson Reuters. As a result of the deal, Porsche will set up research and development and testing facilities in Qatar.
Abu Dhabi’s state-owned investment fund, Advanced Technology Investment Company (ATIC), became a major participant in the global microchip industry on September 7 with its cash purchase of Singapore-based Chartered Semiconductor Manufacturing for $1.8 billion. Chartered’s largest shareholder was Temasek Holdings, an investment company owned by the government of Singapore. ATIC is also the main shareholder in Globalfoundries, a US-based joint venture with Advanced Micro Devices. Globalfoundries and Chartered together will create a manufacturer of next-generation chips that will be big enough to compete with Taiwan’s customized chipmakers, which now control about two-thirds of the global contract chip market. Doug Grose, CEO of Globalfoundries, will run the combined operations with Chartered, which makes chips that run the Microsoft Xbox 360 game consoles. ATIC will assume $3.1 billion in debt and covertible shares of Chartered, which posted a loss of $39 million in the second quarter, its fourth quarterly loss in a row.
On a purely portfolio risk management basis, there are legitimate grounds for asset-rich countries to seek real assets through SWFs, according to State Street. These countries holding large foreign exchange reserves need to avoid the risk that official-sector debtors from the industrialized countries will seek to reduce their nominal liabilities through a policy of inflation, it says.
Tuesday, September 28, 2010
China's possible Potash bid fans unease over SWFs
(Reuters) - China's possible bid for Potash illustrates the priority some surplus-rich countries still put on pursuing strategic national goals with their windfall cash and risks a regulatory backlash against sovereign wealth funds.
Sources say China's state-owned Sinochem could bid for the Canadian firm (POT.TO), possibly partnering with its wealth fund CIC or Singapore's Temasek, in a deal worth almost $40 billion.
A Chinese bid via CIC could become the latest example of emerging and frontier market nations deploying their sovereign wealth as an economic policy tool to secure energy and food needs or buy industries they want to develop at home.
China's designs on Potash may rile recipient countries that have long suspected SWFs -- now major players in global markets with $3 trillion of assets -- invest with national political imperatives to the fore.
The risk is it leads to a round of regulation that could impede the flow of capital from the powerful SWF community that has benefited cash-strapped advanced economies since the global financial crisis struck, and helped emerging economies recycle their windfall surpluses.
"As soon as the business environment improves and liquidity eases, noises against foreign capital are going to start becoming wider. Eventually tougher regulation could be coming," said Pervez Akhtar, a Dubai-based partner in law firm Allen & Overy specializing in corporate finance.
"SWFs are strategic investment funds designed for wider policy considerations of the state. It's a very fine line between making commercial investment and commercial-plus, that is furthering of a strategic policy. More states will do investments on the basis of commercial-plus."
Analysts say China's Potash bid, if it goes through, would serve as a litmus test for other sovereign wealth funds which have sharply reduced headline activities after the crisis.
"SWFs have been hesitant to go out in a big way. (Potash) is a big test for markets. That could then give me the touch and feel of the sentiment that may be prevailing in another sector in Canada," said Sven Behrendt, a SWF expert and managing director of political risk consultancy Geoeconomica.
ROCKY RELATIONSHIP
Sovereign funds, which have had had a rocky relationship with the West, have spent the past couple of years striving to convince that they invest for financial reasons.
It was less than three years ago that French President Nicholas Sarkozy hit out at SWFs, saying: "We've decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes which do not meet the transparency criteria one is entitled to expect in a civilized world."
Such concerns receded as the financial crisis highlighted the importance of long-term capital which sovereign funds can provide to developed economies desperate for liquidity.
SWFs themselves also took steps to enhance transparency, creating the Santiago Principles of best practice guidelines in 2008 to fend off the West's criticism.
However, progress in implementing these self-imposed rules advocating transparency and accountability has been slow and patchy.
And now that the West is awash with liquidity and risk appetite is improving, its stance may be hardening again.
Canada's industry minister, Tony Clement, warned earlier this month that its takeover rules would ensure state-owned enterprises would invest with market-based motives, rather than "acting as an agent for a foreign government's interests."
In Italy, shareholders and politicians upset over a sizeable stake held by Libya's wealth fund and central bank in UniCredit (CRDI.MI) forced its chief executive out earlier this month.
In 2008, that very investment by Libya was welcomed as vote of confidence in the bank. It invested again in 2009.
In Australia, a Qatar Investment Authority-owned firm's investment in farmland prompted a Senate inquiry calling for an audit of foreign ownership of land and water.
"At the present time there is no differentiation between private investment and sovereign investment," New South Wales Liberal Senator Bill Heffernan, who chairs the Senate committee on agricultural and related industries, told a local media.
"We need to put all of this on a register, we need to lower the trigger point for reporting foreign asset sales, and we need as part of our sovereignty to consider (our own) strategic investment in Australia."
Sovereign funds are growing aware of a threat of more regulation, a topic of discussion in a closed-door industry forum last week in London attended by various funds officials.
"There's enough regulation. SWFs are already subject to lots of regulation -- capital, sector, anti-monopoly, then some rules on foreign investment. Why regulate further?" said a head of an emerging market SWF during a recent trip to London.
"Our DNA says we are a sovereign fund, we cannot be purely financial. And there's nothing to apologize for that. When I make an investment, I have to think about jobs and ethics and being a good corporate citizen, otherwise we get beaten up."
(Editing by Mike Peacock)
Sources say China's state-owned Sinochem could bid for the Canadian firm (POT.TO), possibly partnering with its wealth fund CIC or Singapore's Temasek, in a deal worth almost $40 billion.
A Chinese bid via CIC could become the latest example of emerging and frontier market nations deploying their sovereign wealth as an economic policy tool to secure energy and food needs or buy industries they want to develop at home.
China's designs on Potash may rile recipient countries that have long suspected SWFs -- now major players in global markets with $3 trillion of assets -- invest with national political imperatives to the fore.
The risk is it leads to a round of regulation that could impede the flow of capital from the powerful SWF community that has benefited cash-strapped advanced economies since the global financial crisis struck, and helped emerging economies recycle their windfall surpluses.
"As soon as the business environment improves and liquidity eases, noises against foreign capital are going to start becoming wider. Eventually tougher regulation could be coming," said Pervez Akhtar, a Dubai-based partner in law firm Allen & Overy specializing in corporate finance.
"SWFs are strategic investment funds designed for wider policy considerations of the state. It's a very fine line between making commercial investment and commercial-plus, that is furthering of a strategic policy. More states will do investments on the basis of commercial-plus."
Analysts say China's Potash bid, if it goes through, would serve as a litmus test for other sovereign wealth funds which have sharply reduced headline activities after the crisis.
"SWFs have been hesitant to go out in a big way. (Potash) is a big test for markets. That could then give me the touch and feel of the sentiment that may be prevailing in another sector in Canada," said Sven Behrendt, a SWF expert and managing director of political risk consultancy Geoeconomica.
ROCKY RELATIONSHIP
Sovereign funds, which have had had a rocky relationship with the West, have spent the past couple of years striving to convince that they invest for financial reasons.
It was less than three years ago that French President Nicholas Sarkozy hit out at SWFs, saying: "We've decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes which do not meet the transparency criteria one is entitled to expect in a civilized world."
Such concerns receded as the financial crisis highlighted the importance of long-term capital which sovereign funds can provide to developed economies desperate for liquidity.
SWFs themselves also took steps to enhance transparency, creating the Santiago Principles of best practice guidelines in 2008 to fend off the West's criticism.
However, progress in implementing these self-imposed rules advocating transparency and accountability has been slow and patchy.
And now that the West is awash with liquidity and risk appetite is improving, its stance may be hardening again.
Canada's industry minister, Tony Clement, warned earlier this month that its takeover rules would ensure state-owned enterprises would invest with market-based motives, rather than "acting as an agent for a foreign government's interests."
In Italy, shareholders and politicians upset over a sizeable stake held by Libya's wealth fund and central bank in UniCredit (CRDI.MI) forced its chief executive out earlier this month.
In 2008, that very investment by Libya was welcomed as vote of confidence in the bank. It invested again in 2009.
In Australia, a Qatar Investment Authority-owned firm's investment in farmland prompted a Senate inquiry calling for an audit of foreign ownership of land and water.
"At the present time there is no differentiation between private investment and sovereign investment," New South Wales Liberal Senator Bill Heffernan, who chairs the Senate committee on agricultural and related industries, told a local media.
"We need to put all of this on a register, we need to lower the trigger point for reporting foreign asset sales, and we need as part of our sovereignty to consider (our own) strategic investment in Australia."
Sovereign funds are growing aware of a threat of more regulation, a topic of discussion in a closed-door industry forum last week in London attended by various funds officials.
"There's enough regulation. SWFs are already subject to lots of regulation -- capital, sector, anti-monopoly, then some rules on foreign investment. Why regulate further?" said a head of an emerging market SWF during a recent trip to London.
"Our DNA says we are a sovereign fund, we cannot be purely financial. And there's nothing to apologize for that. When I make an investment, I have to think about jobs and ethics and being a good corporate citizen, otherwise we get beaten up."
(Editing by Mike Peacock)
Friday, September 24, 2010
Paulson Could Win Big on Gold: Report
by Paula Schaap ,Senior Reporter , September 24, 2010
Hedge fund manager John Paulson reportedly could be going all out on gold in an attempt to make a killing if the precious metal continues its climb.
Paulson’s $600 million gold fund is up 15% through August, according to a Forbes report.
Besides gold ETFs, Paulson’s fund is invested in gold mining companies, a fairly typical play by hedge fund managers.
George Soros and David Einhorn have also invested in ETFs and miners, using their bets as a hedge against inflation.
Recently, however, Soros said he thought gold could be the “ultimate bubble.”
Gold closed at $1,294.50 per troy ounce Thursday, an all-time high.
Source: www.hedgefund.net
Hedge fund manager John Paulson reportedly could be going all out on gold in an attempt to make a killing if the precious metal continues its climb.
Paulson’s $600 million gold fund is up 15% through August, according to a Forbes report.
Besides gold ETFs, Paulson’s fund is invested in gold mining companies, a fairly typical play by hedge fund managers.
George Soros and David Einhorn have also invested in ETFs and miners, using their bets as a hedge against inflation.
Recently, however, Soros said he thought gold could be the “ultimate bubble.”
Gold closed at $1,294.50 per troy ounce Thursday, an all-time high.
Source: www.hedgefund.net
Monday, September 20, 2010
Real Falls as Sovereign Wealth Fund Approved to Buy Dollars
By Ye Xie
Sept. 20 (Bloomberg) -- Brazil’s real fell for a second day after the government authorized its sovereign wealth fund to start purchasing foreign currencies such as the dollar.
Brazil’s sovereign wealth fund has “no limit” on investing in such currencies, the Treasury said in an e-mailed statement. Finance Minister Guido Mantega last week vowed to take measures to prevent the real from strengthening further after the currency rose 33.6 percent since the beginning of 2009.
The real fell 0.7 percent to 1.7331 per dollar, from 1.7213 on Sept. 17. The currency touched 1.7031 on Sept. 14, the strongest level since December, on increased foreign purchase of Brazilian companies stocks and bonds.
The yield on Brazil’s interest-rate futures contract due in January 2012 rose six basis points, or 0.06 percentage point, to 11.51 percent, the highest level since Aug. 12.
Brazil’s inflation will end 2011 at 4.95 percent, up from a week earlier forecast of 4.90 percent, according to the median forecast in a Sept. 17 central bank survey of about 100 economists published today. Economists also raised their 2010 inflation forecast to 5.01 percent, from 4.97 percent a week earlier.
Sept. 20 (Bloomberg) -- Brazil’s real fell for a second day after the government authorized its sovereign wealth fund to start purchasing foreign currencies such as the dollar.
Brazil’s sovereign wealth fund has “no limit” on investing in such currencies, the Treasury said in an e-mailed statement. Finance Minister Guido Mantega last week vowed to take measures to prevent the real from strengthening further after the currency rose 33.6 percent since the beginning of 2009.
The real fell 0.7 percent to 1.7331 per dollar, from 1.7213 on Sept. 17. The currency touched 1.7031 on Sept. 14, the strongest level since December, on increased foreign purchase of Brazilian companies stocks and bonds.
The yield on Brazil’s interest-rate futures contract due in January 2012 rose six basis points, or 0.06 percentage point, to 11.51 percent, the highest level since Aug. 12.
Brazil’s inflation will end 2011 at 4.95 percent, up from a week earlier forecast of 4.90 percent, according to the median forecast in a Sept. 17 central bank survey of about 100 economists published today. Economists also raised their 2010 inflation forecast to 5.01 percent, from 4.97 percent a week earlier.
Thursday, September 16, 2010
China should cut dollars if U.S. too loose: sovereign fund
(Reuters) - China should sell dollars and diversify its foreign exchange reserves if the United States sticks to loose monetary policy, the head of the Chinese sovereign wealth fund said in an article published this week.
Lou Jiwei, chairman of the $300 billion China Investment Corp, also offered policy advice to the United States, saying the best course of action would be for it to tighten monetary conditions while ramping up stimulus spending.
He said the United States did not have much to gain from monetary easing, because little cash was entering the real economy and a large amount was leaving the country via dollar-funded carry trades.
Under such conditions, the dollar would steadily depreciate, and Asian economies and oil exporters might lose faith in it as a global reserve currency, he said.
"For China, the chief tools to reduce economic risks are to strengthen regulation of capital flows, control liquidity through cash management, monitor asset markets and divert foreign exchange reserves to non-dollar assets," Lou said.
The article was published this week as part of a book for the Second Summer Palace Dialogue, a meeting of American and Chinese economists that took place in Beijing.
It appeared that Lou had written the article at least several months earlier, but this was the first time that it had been published.
There is evidence that China has, in fact, stepped up its pace of foreign exchange diversification this year, cutting back its vast holdings of U.S. Treasuries and buying record amounts of Japanese and South Korean debt.
But Lou said that it was not too late for the dollar. A move toward tighter monetary policy would reduce expectations of depreciation, restrain the dollar-funded carry trade and support global financial stability, he said.
For the U.S. economy, tighter monetary policy could also pay unexpected dividends, he said.
"If the dollar carry-trade lessens and capital from Asian countries and oil-exporting countries continues to flow to the United States, then liquidity in the United States might even increase," he said.
(Reporting by Simon Rabinovitch; Editing by Jacqueline Wong)
Source: www.reuters.com
Lou Jiwei, chairman of the $300 billion China Investment Corp, also offered policy advice to the United States, saying the best course of action would be for it to tighten monetary conditions while ramping up stimulus spending.
He said the United States did not have much to gain from monetary easing, because little cash was entering the real economy and a large amount was leaving the country via dollar-funded carry trades.
Under such conditions, the dollar would steadily depreciate, and Asian economies and oil exporters might lose faith in it as a global reserve currency, he said.
"For China, the chief tools to reduce economic risks are to strengthen regulation of capital flows, control liquidity through cash management, monitor asset markets and divert foreign exchange reserves to non-dollar assets," Lou said.
The article was published this week as part of a book for the Second Summer Palace Dialogue, a meeting of American and Chinese economists that took place in Beijing.
It appeared that Lou had written the article at least several months earlier, but this was the first time that it had been published.
There is evidence that China has, in fact, stepped up its pace of foreign exchange diversification this year, cutting back its vast holdings of U.S. Treasuries and buying record amounts of Japanese and South Korean debt.
But Lou said that it was not too late for the dollar. A move toward tighter monetary policy would reduce expectations of depreciation, restrain the dollar-funded carry trade and support global financial stability, he said.
For the U.S. economy, tighter monetary policy could also pay unexpected dividends, he said.
"If the dollar carry-trade lessens and capital from Asian countries and oil-exporting countries continues to flow to the United States, then liquidity in the United States might even increase," he said.
(Reporting by Simon Rabinovitch; Editing by Jacqueline Wong)
Source: www.reuters.com
Sovereign Wealth Funds Are Going Mainstream
The financial crisis has forced most investors to question their assumptions about markets and reconsider their strategies. For sovereign wealth funds, those shadowy juggernauts that once seemed impervious to market swings, the challenge has been particularly great.
When sovereign funds burst onto the public scene a few years ago, their massive buying power and lack of transparency aroused fear and distrust in many Western capitals, where officials worried that governments might use sovereign funds to achieve political rather than commercial objectives. Then, when the crisis erupted and Western banks were desperate for capital, sovereign funds suddenly found themselves courted for their deep pockets and long investing horizons. Among some of the more notable deals: The Abu Dhabi Investment Authority came to Citigroup’s rescue by paying $7.5 billion for a 4.9 percent stake; China Investment Corp. injected $5.6 billion into Morgan Stanley; and Singapore’s Temasek Holdings made chunky investments in Merrill Lynch & Co., Barclays and Standard Chartered.
These days, however, the formerly high-flying sovereign wealth funds have come back to earth. Many suffered losses on their big financial services investments. Others have been whipsawed by the same volatile market swings that have hammered countless institutional investors. And some — like the Kuwait Investment Authority, Ireland’s National Pensions Reserve Fund and Russia’s two funds, the Reserve and National Wealth funds — have been raided by their own treasuries to bail out troubled banks and companies in their domestic economies. Now many sovereign funds find themselves like most other institutional investors: struggling to scrape together profits in unpredictable markets and rethinking their appetite for risk as they restructure their portfolios.
“Many sovereign wealth funds are now asking themselves, ‘Does a strategy that was formulated in the precrisis environment still remain valid in a postcrisis world?’” says Ousmène Mandeng, head of public sector investment advisory at the $35.3 billion-in-assets Ashmore Investment Management in London. “That is not an easy question to answer. The short-term outlook is uncertain, and the medium-term view is likely to be a function of the short term if we slide back into another recession. Many institutions are still holding back a little until they have a better idea of what this new environment will look like.”
Although the performance of specific funds is hard to judge because so few disclose their results, sovereign funds have clearly taken some big hits in the crisis. Assets managed by sovereign wealth funds declined to an estimated $3.8 trillion at the end of 2009, from $4 trillion a year earlier, according to a report published in July by the United Nations Conference on Trade and Development. Those figures most likely understate the true volatility of the funds. Analysts at Deutsche Bank estimate that sovereign wealth fund assets hit a low of about $3 trillion in early 2009, when global markets were tanking.
The Abu Dhabi Investment Authority, established in 1976 to invest the Gulf emirate’s massive oil earnings, is the world’s largest sovereign wealth fund, with an estimated $627 billion in assets at the end of March, according to Institutional Investor’s first ranking of the World’s Biggest Sovereign Wealth Funds. Norway’s Government Pension Fund Global is the second-largest fund, with $461.5 billion in assets. The Saudi Arabian Monetary Agency, China Investment Corp. and Hong Kong Monetary Authority round out the top five.
The new cautious attitude among sovereign wealth funds is most evident in the financial sector, where funds made some of their most prominent investments — and recorded some of their most notorious losses. Some sovereign wealth funds have pulled back sharply from Wall Street. Temasek reportedly sold its stake in Bank of America Corp. last year at a loss estimated at as much as $4.6 billion. Others have dialed back their exposure more modestly. As for new money, the funds have abandoned their spendthrift ways. Sovereign wealth funds made just 28 deals, worth a total of $10.2 billion, in the financial services sector in 2009, a far cry from the 49 publicly reported deals worth $81.7 billion in 2008, according to the Monitor Group, a market research and advisory firm based in Cambridge, Massachusetts. Across all industry sectors, funds tracked by the Monitor Group made just 113 publicly announced investments, worth a total of $68.8 billion, in 2009 — down from 175 deals, worth $128 billion, a year earlier. Hedge funds are still able to attract the interest of sovereign wealth funds, but private equity, which has long been the favorite playground of the sovereigns, lost much of its shine during the crisis.
More broadly, several sovereign funds have been turning to passive strategies for more of their exposure and limiting active investing to areas where they believe they have a clear advantage or market view. The approach is one that Abu Dhabi’s former chief, Ahmed bin Zayed al-Nahyan — who was killed in a glider crash in Morocco in March — began to implement in 2007, raising the fund’s passive allocation to 60 percent from 45 percent.
This shift is far from uniform, and sovereign funds haven’t given up on risk entirely. But the new attitude represents a significant change from the precrisis years, when many sovereign funds boldly sought higher returns by ramping up their equity allocations, taking direct stakes in companies and seeking more arcane (and less liquid) investments in private equity and hedge funds.
“The crisis has left an indelible mark on sovereign wealth funds for the simple reason that all of the assumptions that went into managing those assets have been questioned dramatically,” says Andrew Rozanov, head of sovereign advisory at London-based fund-of-hedge-funds firm Permal Investment Management Services and the man who coined the term sovereign wealth fund. “Some funds discovered that they’d underestimated the amount of U.S. dollar liquidity that they needed to hold in their portfolios. Others realized that they’d miscalculated the risk tolerance of the general public, which didn’t fully understand and appreciate their long-term investment horizons. And many of those funds that were trying to emulate some version of the Yale endowment model were disappointed — and may now be taking a long, hard look at its key tenets.”
In Norway the Finance Ministry demanded that Norges Bank Investment Management, the central bank arm that oversees Norway’s giant pension fund, submit to an external review of its active-management program. Other sovereign investors have kept internal debates about investment strategy private, but there is little doubt among asset managers who work closely with sovereign investors that such debates are raging widely.
Beyond the urgent need to address portfolio strategy, several sovereign wealth fund investors have faced political demands on their capital. Under a government-ordered rescue plan, the Kuwait Investment Authority in January 2009 took a 16 percent stake in the struggling Gulf Bank to help the company raise 375 million dinars ($1.3 billion) in emergency funding, and it injected about 400 million dinars into a dedicated fund to support the local stock market in the first four months of that year. Abu Dhabi has had to bail out its troubled fellow emirate, Dubai, pumping in an estimated $10 billion in emergency funding since last year. That funding has dramatically reduced the amount of oil revenue available to ADIA.
In Russia the government used the National Wealth Fund, a pool designed to be invested abroad for future generations, to support the domestic stock market at the peak of the crisis. It has also tapped the Reserve Fund to help make up its budget shortfall, a purpose for which it was intended. The Russian government has also started diverting hydrocarbon revenues to the budget, a move that could starve its sovereign wealth funds of capital.
In the wake of those cash drains, sovereign wealth funds now face the problem that without clear governance guidelines defining how their funds can be deployed, their complex liabilities may be hard, if not impossible, to model and manage. That heightened vulnerability has made some investment teams more cautious. “The greatest risk to sovereign wealth funds that I see is political risk, not the risk of broader macroeconomic uncertainty,” says Judith Posnikoff, a co-founder of Irvine, California–based fund-of-hedge-funds firm Pacific Alternative Asset Management Co., which works with a number of sovereign funds. “If the global economic recovery continues to slow, certain regions of the world may see a need to raid those funds.”
The challenges facing sovereign funds may have multiplied, but these investors remain a potent force with enviable long-term prospects. Sovereign wealth funds control about 3 percent of all institutional money invested in global markets, according to Deutsche Bank, and they are likely to enjoy strong inflows from oil and other commodity revenues and a recovery in export earnings. Steffen Kern, a director of research at Deutsche Bank in Frankfurt, projects that sovereign wealth fund assets will more than double, to $10 trillion, by 2020. Stephen Jen, who followed the rise of sovereign wealth funds for several years as a global currency strategist for Morgan Stanley and now works as head of macroeconomics and currencies at London hedge fund firm BlueGold Capital Management, says sovereign fund assets could hit $10.9 trillion as early as 2015.
Sovereign wealth funds also face a more-benign political environment, reducing the prospect of foreign opposition to their investments. A key factor here has been the 2008 adoption of generally accepted principles and practices, known as the Santiago Principles after the city in which they were drafted. These principles, which call for funds to have clear governance and investing guidelines, follow economic criteria and comply with regulatory requirements in countries where they invest, followed rounds of negotiations among 26 countries under the auspices of the International Monetary Fund. Although some critics dismiss the voluntary guidelines as toothless, the principles have provided a framework for better disclosure and helped allay the fears of Western politicians. The subsequent creation of the International Forum of Sovereign Wealth Funds, which brought together senior managers of 22 sovereign funds and officials from six recipient countries at a meeting in Sydney in May, has eased tensions further by creating a permanent avenue for dialogue.
As they seek to adjust their risk appetite, sovereign funds are well positioned to take advantage of market opportunities, says Mohamed El-Erian, CEO and co-CIO of Pacific Investment Management Co. in Newport Beach, California. “Virtually everybody was caught offside by the financial crisis,” he says. “The question is, How quickly do people emerge from damage-containment mode and start looking forward? I see that as a function of two attributes: an investor’s initial conditions and mind-set. For us sovereign wealth funds score highly on both. They are long-term, patient investors, with surplus capital — and they are trying to figure out how they need to be positioned for the next ten to 20 years.”
The most dramatic and visible example of a sovereign wealth fund positioning itself for future growth while doing postcrisis damage control can be found within the halls of Norges Bank Investment Management in Oslo. Norway’s Government Pension Fund Global, as it is known, is the second-largest sovereign fund in the world, with $462 billion in assets, after Abu Dhabi’s ADIA, but the similarities end with size. Unlike ADIA, which is notoriously secretive and inaccessible, NBIM is transparent about its strategy, which has long relied on passive indexing.
Under the leadership of Yngve Slyngstad, who took over as CEO in January 2008, NBIM embarked on a major overhaul of its portfolio strategy right in the thick of the crisis. Slyngstad wanted to ramp up returns by taking larger stakes of up to 10 percent in individual companies, up from a previous ceiling of 5 percent, increasing allocations to emerging markets and making long and short bets on global investment sectors and currencies. Norway’s Finance Ministry approved the new strategy and parliament ratified it in June 2008. The fund, which had been building up its equity holdings since the summer of 2007, lifted its allocation to 60 percent from 40 percent only to be hit by the chaos that followed the September 2008 bankruptcy of Lehman Brothers Holdings.
By the end of 2008, the fund was down 23.3 percent, the worst loss in its 14-year history. The fund took big hits on its holdings of U.S. bank stocks; fixed-income didn’t perform much better, owing to the fund’s exposure to U.S. mortgage-backed securities and bonds issued by European financial institutions. Worse, the active-management program didn’t perform as Slyngstad had hoped, contributing a negative excess return of 3.4 percentage points relative to the fund’s customized benchmark portfolio. But having agreed on a strategy with the Finance Ministry, Slyngstad and his team stayed with it.
“We were able to make such a significant move in the middle of the financial crisis because of the governance structure of the whole fund,” says Slyngstad. After plunging equity prices reduced the fund’s allocation to 50 percent at the end of 2008, he and his team bought equities in the first quarter of 2009 — at the depressed prices then prevailing — to get back to their 60 percent target. “We have a 30-year horizon, so it would have been more of a challenge to explain had we not rebalanced,” he explains. “We couldn’t just say that, ‘Well, we forgot the rules this time, because this time was different.’”
NBIM’s approach stood out among sovereign wealth funds, according to Gary Smith, head of central banks, supranationals and sovereign wealth funds at BNP Paribas Investment Partners in London. Many of NBIM’s peers didn’t make an effort to rebalance their portfolios even as equity markets plummeted. “They allowed market forces to change their asset allocations for them,” Smith says.
Smith blames the sudden paralysis at most sovereign funds on their political masters, who recoiled at the scale of the equity losses suffered in the crisis. By contrast, he says, NBIM had done such a good job of selling its asset-allocation strategy to the Finance Ministry before the crisis that politicians didn’t second-guess Slyngstad. The ministry was more intent on understanding the contribution that active management had made to the fund’s losses. By August 2009 the ministry had launched an external review of the new strategy, and by the time the report was published, in December 2009, the fund was already well on its way to recovery. Norway’s fund posted a record return of 25.6 percent in 2009, 4.1 percentage points higher than its benchmark portfolio. This year the fund rose 3.9 percent in the first quarter, but widespread declines in global equity markets caused the fund to lose 5.4 percent in the second quarter.
The pros and cons of active management have been on the minds of all institutional investors, especially sovereigns. Before the crisis many large institutions assumed that active management was the best way to invest virtually all their assets, says John Nugée, London-based head of the official institutions group at Boston’s State Street Global Advisors. Now that approach has begun to shift, he says. Many sovereign investors are assuming that passive management is a good place to start when entering a new or unfamiliar asset class.
“Passive management ties in with increasing asset-class diversification too,” Nugée says, “because if you have a presumption of managing slightly more of your assets passively, you preserve that part of the risk budget — that portion of the volatility that would have gone into actively managing a portfolio — and you make it available to move into other, new asset classes in a passive way.”
The distinctions now being made between active and passive management are part of a more fundamental shift in institutional portfolio strategy, and one that some sovereign funds are at the forefront of. Many fund managers are now reviewing their portfolios by looking at the underlying risks inherent in certain asset classes. A fund putting money into private equity, for example, is effectively taking on illiquidity risk and certain macroeconomic risks, such as inflation. Most managers ignored those perils during the boom years, if they were even aware of them at all, but the crisis demonstrated how broad, systemic risks could affect seemingly diversified investments in a similar way.
Prompted in part by the review of its active-management program, NBIM has begun to focus more closely on systemic risks and integrate those assessments into its portfolio strategy. And rather than concentrating only on the potential negatives of those risks, Slyngstad says, he and his team are using risk factors to size up possible opportunities. Europe’s sovereign-debt crisis is a case in point. The Norwegian fund went into the crisis significantly underweight the government bonds of many southern European countries, he says. His team has taken advantage of the recent turmoil to increase that weighting, buying bonds at depressed levels and getting a hefty yield premium for taking on the credit risk. “We are now looking at these events as opportunities rather than as the scary things you have to avoid,” Slyngstad says.
Even as they refine their approach to risk, sovereign wealth funds continue to show an appetite for big, high-profile investments. In August 2009, Qatar Holding, an arm of the Qatar Investment Authority that makes direct investments, bought 10 percent of Germany’s Porsche Automobil Holding for a reported $9.98 billion. In May of this year, Qatar Holding splashed out again and bought fabled London department store Harrods for a reported £1.5 billion ($2.3 billion).
Other funds have shown an interest in commodities and infrastructure plays. In July 2009, China Investment Corp. paid a reported C$1.74 billion ($1.5 billion) for a 17.2 percent stake in Teck Resources, Canada’s largest mining and metallurgical company. Last month, ADIA reportedly agreed to team up with Morgan Stanley and U.K. private equity group 3i Group to bid for the high-speed railway that links London with the Channel Tunnel.
Such prominent investments are bound to attract closer scrutiny, especially given the fact that many sovereign funds give limited information about their strategy and often fail to disclose the amount of funds they manage. The Santiago Principles have helped ease political concerns; but Sven Behrendt, a visiting scholar with the Carnegie Middle East Center in Beirut, contends that only four of the 26 funds that signed up to the agreement — the Australian Future Fund, Ireland’s National Pensions Reserve Fund, Norway’s Government Pension Fund Global and the New Zealand Superannuation Fund — comply fully with the principles.
Sovereign wealth funds will have plenty of opportunity to show their hand in the years ahead. Their pockets are deep, and growing, and they still have a much longer time horizon than most institutional investors.
“We will see greater differentiation among institutions as their needs start to diverge,” says Ashmore’s Mandeng. “Pension funds will come under greater redemption demands and will need to be in redeemable assets. Sovereign wealth funds, however, are still likely to have more latitude — and may well prove to be the only true long-term investors left standing.”
Source: www.emii.com
When sovereign funds burst onto the public scene a few years ago, their massive buying power and lack of transparency aroused fear and distrust in many Western capitals, where officials worried that governments might use sovereign funds to achieve political rather than commercial objectives. Then, when the crisis erupted and Western banks were desperate for capital, sovereign funds suddenly found themselves courted for their deep pockets and long investing horizons. Among some of the more notable deals: The Abu Dhabi Investment Authority came to Citigroup’s rescue by paying $7.5 billion for a 4.9 percent stake; China Investment Corp. injected $5.6 billion into Morgan Stanley; and Singapore’s Temasek Holdings made chunky investments in Merrill Lynch & Co., Barclays and Standard Chartered.
These days, however, the formerly high-flying sovereign wealth funds have come back to earth. Many suffered losses on their big financial services investments. Others have been whipsawed by the same volatile market swings that have hammered countless institutional investors. And some — like the Kuwait Investment Authority, Ireland’s National Pensions Reserve Fund and Russia’s two funds, the Reserve and National Wealth funds — have been raided by their own treasuries to bail out troubled banks and companies in their domestic economies. Now many sovereign funds find themselves like most other institutional investors: struggling to scrape together profits in unpredictable markets and rethinking their appetite for risk as they restructure their portfolios.
“Many sovereign wealth funds are now asking themselves, ‘Does a strategy that was formulated in the precrisis environment still remain valid in a postcrisis world?’” says Ousmène Mandeng, head of public sector investment advisory at the $35.3 billion-in-assets Ashmore Investment Management in London. “That is not an easy question to answer. The short-term outlook is uncertain, and the medium-term view is likely to be a function of the short term if we slide back into another recession. Many institutions are still holding back a little until they have a better idea of what this new environment will look like.”
Although the performance of specific funds is hard to judge because so few disclose their results, sovereign funds have clearly taken some big hits in the crisis. Assets managed by sovereign wealth funds declined to an estimated $3.8 trillion at the end of 2009, from $4 trillion a year earlier, according to a report published in July by the United Nations Conference on Trade and Development. Those figures most likely understate the true volatility of the funds. Analysts at Deutsche Bank estimate that sovereign wealth fund assets hit a low of about $3 trillion in early 2009, when global markets were tanking.
The Abu Dhabi Investment Authority, established in 1976 to invest the Gulf emirate’s massive oil earnings, is the world’s largest sovereign wealth fund, with an estimated $627 billion in assets at the end of March, according to Institutional Investor’s first ranking of the World’s Biggest Sovereign Wealth Funds. Norway’s Government Pension Fund Global is the second-largest fund, with $461.5 billion in assets. The Saudi Arabian Monetary Agency, China Investment Corp. and Hong Kong Monetary Authority round out the top five.
The new cautious attitude among sovereign wealth funds is most evident in the financial sector, where funds made some of their most prominent investments — and recorded some of their most notorious losses. Some sovereign wealth funds have pulled back sharply from Wall Street. Temasek reportedly sold its stake in Bank of America Corp. last year at a loss estimated at as much as $4.6 billion. Others have dialed back their exposure more modestly. As for new money, the funds have abandoned their spendthrift ways. Sovereign wealth funds made just 28 deals, worth a total of $10.2 billion, in the financial services sector in 2009, a far cry from the 49 publicly reported deals worth $81.7 billion in 2008, according to the Monitor Group, a market research and advisory firm based in Cambridge, Massachusetts. Across all industry sectors, funds tracked by the Monitor Group made just 113 publicly announced investments, worth a total of $68.8 billion, in 2009 — down from 175 deals, worth $128 billion, a year earlier. Hedge funds are still able to attract the interest of sovereign wealth funds, but private equity, which has long been the favorite playground of the sovereigns, lost much of its shine during the crisis.
More broadly, several sovereign funds have been turning to passive strategies for more of their exposure and limiting active investing to areas where they believe they have a clear advantage or market view. The approach is one that Abu Dhabi’s former chief, Ahmed bin Zayed al-Nahyan — who was killed in a glider crash in Morocco in March — began to implement in 2007, raising the fund’s passive allocation to 60 percent from 45 percent.
This shift is far from uniform, and sovereign funds haven’t given up on risk entirely. But the new attitude represents a significant change from the precrisis years, when many sovereign funds boldly sought higher returns by ramping up their equity allocations, taking direct stakes in companies and seeking more arcane (and less liquid) investments in private equity and hedge funds.
“The crisis has left an indelible mark on sovereign wealth funds for the simple reason that all of the assumptions that went into managing those assets have been questioned dramatically,” says Andrew Rozanov, head of sovereign advisory at London-based fund-of-hedge-funds firm Permal Investment Management Services and the man who coined the term sovereign wealth fund. “Some funds discovered that they’d underestimated the amount of U.S. dollar liquidity that they needed to hold in their portfolios. Others realized that they’d miscalculated the risk tolerance of the general public, which didn’t fully understand and appreciate their long-term investment horizons. And many of those funds that were trying to emulate some version of the Yale endowment model were disappointed — and may now be taking a long, hard look at its key tenets.”
In Norway the Finance Ministry demanded that Norges Bank Investment Management, the central bank arm that oversees Norway’s giant pension fund, submit to an external review of its active-management program. Other sovereign investors have kept internal debates about investment strategy private, but there is little doubt among asset managers who work closely with sovereign investors that such debates are raging widely.
Beyond the urgent need to address portfolio strategy, several sovereign wealth fund investors have faced political demands on their capital. Under a government-ordered rescue plan, the Kuwait Investment Authority in January 2009 took a 16 percent stake in the struggling Gulf Bank to help the company raise 375 million dinars ($1.3 billion) in emergency funding, and it injected about 400 million dinars into a dedicated fund to support the local stock market in the first four months of that year. Abu Dhabi has had to bail out its troubled fellow emirate, Dubai, pumping in an estimated $10 billion in emergency funding since last year. That funding has dramatically reduced the amount of oil revenue available to ADIA.
In Russia the government used the National Wealth Fund, a pool designed to be invested abroad for future generations, to support the domestic stock market at the peak of the crisis. It has also tapped the Reserve Fund to help make up its budget shortfall, a purpose for which it was intended. The Russian government has also started diverting hydrocarbon revenues to the budget, a move that could starve its sovereign wealth funds of capital.
In the wake of those cash drains, sovereign wealth funds now face the problem that without clear governance guidelines defining how their funds can be deployed, their complex liabilities may be hard, if not impossible, to model and manage. That heightened vulnerability has made some investment teams more cautious. “The greatest risk to sovereign wealth funds that I see is political risk, not the risk of broader macroeconomic uncertainty,” says Judith Posnikoff, a co-founder of Irvine, California–based fund-of-hedge-funds firm Pacific Alternative Asset Management Co., which works with a number of sovereign funds. “If the global economic recovery continues to slow, certain regions of the world may see a need to raid those funds.”
The challenges facing sovereign funds may have multiplied, but these investors remain a potent force with enviable long-term prospects. Sovereign wealth funds control about 3 percent of all institutional money invested in global markets, according to Deutsche Bank, and they are likely to enjoy strong inflows from oil and other commodity revenues and a recovery in export earnings. Steffen Kern, a director of research at Deutsche Bank in Frankfurt, projects that sovereign wealth fund assets will more than double, to $10 trillion, by 2020. Stephen Jen, who followed the rise of sovereign wealth funds for several years as a global currency strategist for Morgan Stanley and now works as head of macroeconomics and currencies at London hedge fund firm BlueGold Capital Management, says sovereign fund assets could hit $10.9 trillion as early as 2015.
Sovereign wealth funds also face a more-benign political environment, reducing the prospect of foreign opposition to their investments. A key factor here has been the 2008 adoption of generally accepted principles and practices, known as the Santiago Principles after the city in which they were drafted. These principles, which call for funds to have clear governance and investing guidelines, follow economic criteria and comply with regulatory requirements in countries where they invest, followed rounds of negotiations among 26 countries under the auspices of the International Monetary Fund. Although some critics dismiss the voluntary guidelines as toothless, the principles have provided a framework for better disclosure and helped allay the fears of Western politicians. The subsequent creation of the International Forum of Sovereign Wealth Funds, which brought together senior managers of 22 sovereign funds and officials from six recipient countries at a meeting in Sydney in May, has eased tensions further by creating a permanent avenue for dialogue.
As they seek to adjust their risk appetite, sovereign funds are well positioned to take advantage of market opportunities, says Mohamed El-Erian, CEO and co-CIO of Pacific Investment Management Co. in Newport Beach, California. “Virtually everybody was caught offside by the financial crisis,” he says. “The question is, How quickly do people emerge from damage-containment mode and start looking forward? I see that as a function of two attributes: an investor’s initial conditions and mind-set. For us sovereign wealth funds score highly on both. They are long-term, patient investors, with surplus capital — and they are trying to figure out how they need to be positioned for the next ten to 20 years.”
The most dramatic and visible example of a sovereign wealth fund positioning itself for future growth while doing postcrisis damage control can be found within the halls of Norges Bank Investment Management in Oslo. Norway’s Government Pension Fund Global, as it is known, is the second-largest sovereign fund in the world, with $462 billion in assets, after Abu Dhabi’s ADIA, but the similarities end with size. Unlike ADIA, which is notoriously secretive and inaccessible, NBIM is transparent about its strategy, which has long relied on passive indexing.
Under the leadership of Yngve Slyngstad, who took over as CEO in January 2008, NBIM embarked on a major overhaul of its portfolio strategy right in the thick of the crisis. Slyngstad wanted to ramp up returns by taking larger stakes of up to 10 percent in individual companies, up from a previous ceiling of 5 percent, increasing allocations to emerging markets and making long and short bets on global investment sectors and currencies. Norway’s Finance Ministry approved the new strategy and parliament ratified it in June 2008. The fund, which had been building up its equity holdings since the summer of 2007, lifted its allocation to 60 percent from 40 percent only to be hit by the chaos that followed the September 2008 bankruptcy of Lehman Brothers Holdings.
By the end of 2008, the fund was down 23.3 percent, the worst loss in its 14-year history. The fund took big hits on its holdings of U.S. bank stocks; fixed-income didn’t perform much better, owing to the fund’s exposure to U.S. mortgage-backed securities and bonds issued by European financial institutions. Worse, the active-management program didn’t perform as Slyngstad had hoped, contributing a negative excess return of 3.4 percentage points relative to the fund’s customized benchmark portfolio. But having agreed on a strategy with the Finance Ministry, Slyngstad and his team stayed with it.
“We were able to make such a significant move in the middle of the financial crisis because of the governance structure of the whole fund,” says Slyngstad. After plunging equity prices reduced the fund’s allocation to 50 percent at the end of 2008, he and his team bought equities in the first quarter of 2009 — at the depressed prices then prevailing — to get back to their 60 percent target. “We have a 30-year horizon, so it would have been more of a challenge to explain had we not rebalanced,” he explains. “We couldn’t just say that, ‘Well, we forgot the rules this time, because this time was different.’”
NBIM’s approach stood out among sovereign wealth funds, according to Gary Smith, head of central banks, supranationals and sovereign wealth funds at BNP Paribas Investment Partners in London. Many of NBIM’s peers didn’t make an effort to rebalance their portfolios even as equity markets plummeted. “They allowed market forces to change their asset allocations for them,” Smith says.
Smith blames the sudden paralysis at most sovereign funds on their political masters, who recoiled at the scale of the equity losses suffered in the crisis. By contrast, he says, NBIM had done such a good job of selling its asset-allocation strategy to the Finance Ministry before the crisis that politicians didn’t second-guess Slyngstad. The ministry was more intent on understanding the contribution that active management had made to the fund’s losses. By August 2009 the ministry had launched an external review of the new strategy, and by the time the report was published, in December 2009, the fund was already well on its way to recovery. Norway’s fund posted a record return of 25.6 percent in 2009, 4.1 percentage points higher than its benchmark portfolio. This year the fund rose 3.9 percent in the first quarter, but widespread declines in global equity markets caused the fund to lose 5.4 percent in the second quarter.
The pros and cons of active management have been on the minds of all institutional investors, especially sovereigns. Before the crisis many large institutions assumed that active management was the best way to invest virtually all their assets, says John Nugée, London-based head of the official institutions group at Boston’s State Street Global Advisors. Now that approach has begun to shift, he says. Many sovereign investors are assuming that passive management is a good place to start when entering a new or unfamiliar asset class.
“Passive management ties in with increasing asset-class diversification too,” Nugée says, “because if you have a presumption of managing slightly more of your assets passively, you preserve that part of the risk budget — that portion of the volatility that would have gone into actively managing a portfolio — and you make it available to move into other, new asset classes in a passive way.”
The distinctions now being made between active and passive management are part of a more fundamental shift in institutional portfolio strategy, and one that some sovereign funds are at the forefront of. Many fund managers are now reviewing their portfolios by looking at the underlying risks inherent in certain asset classes. A fund putting money into private equity, for example, is effectively taking on illiquidity risk and certain macroeconomic risks, such as inflation. Most managers ignored those perils during the boom years, if they were even aware of them at all, but the crisis demonstrated how broad, systemic risks could affect seemingly diversified investments in a similar way.
Prompted in part by the review of its active-management program, NBIM has begun to focus more closely on systemic risks and integrate those assessments into its portfolio strategy. And rather than concentrating only on the potential negatives of those risks, Slyngstad says, he and his team are using risk factors to size up possible opportunities. Europe’s sovereign-debt crisis is a case in point. The Norwegian fund went into the crisis significantly underweight the government bonds of many southern European countries, he says. His team has taken advantage of the recent turmoil to increase that weighting, buying bonds at depressed levels and getting a hefty yield premium for taking on the credit risk. “We are now looking at these events as opportunities rather than as the scary things you have to avoid,” Slyngstad says.
Even as they refine their approach to risk, sovereign wealth funds continue to show an appetite for big, high-profile investments. In August 2009, Qatar Holding, an arm of the Qatar Investment Authority that makes direct investments, bought 10 percent of Germany’s Porsche Automobil Holding for a reported $9.98 billion. In May of this year, Qatar Holding splashed out again and bought fabled London department store Harrods for a reported £1.5 billion ($2.3 billion).
Other funds have shown an interest in commodities and infrastructure plays. In July 2009, China Investment Corp. paid a reported C$1.74 billion ($1.5 billion) for a 17.2 percent stake in Teck Resources, Canada’s largest mining and metallurgical company. Last month, ADIA reportedly agreed to team up with Morgan Stanley and U.K. private equity group 3i Group to bid for the high-speed railway that links London with the Channel Tunnel.
Such prominent investments are bound to attract closer scrutiny, especially given the fact that many sovereign funds give limited information about their strategy and often fail to disclose the amount of funds they manage. The Santiago Principles have helped ease political concerns; but Sven Behrendt, a visiting scholar with the Carnegie Middle East Center in Beirut, contends that only four of the 26 funds that signed up to the agreement — the Australian Future Fund, Ireland’s National Pensions Reserve Fund, Norway’s Government Pension Fund Global and the New Zealand Superannuation Fund — comply fully with the principles.
Sovereign wealth funds will have plenty of opportunity to show their hand in the years ahead. Their pockets are deep, and growing, and they still have a much longer time horizon than most institutional investors.
“We will see greater differentiation among institutions as their needs start to diverge,” says Ashmore’s Mandeng. “Pension funds will come under greater redemption demands and will need to be in redeemable assets. Sovereign wealth funds, however, are still likely to have more latitude — and may well prove to be the only true long-term investors left standing.”
Source: www.emii.com
Soros: Gold Not Safe Anymore
by Paula Schaap ,Senior Reporter , September 16, 2010
Hedge fund manager George Soros said, despite his play in gold, that the precious metal wasn’t a safe bet anymore.
Speaking at a conference sponsored by Reuters, Soros warned while the commodity could go higher, it’s the “ultimate bubble.”
Soros has been calling a gold bubble since the start of the year. Yet, at the same time, he has invested heavily in gold ETFs through the SPDR Gold Trust and in gold mining companies, according to regulatory filings.
Gold prices were up to a new high early Thursday morning, at $1,278 per ouce.
Butn Soros said, in times of economic uncertainty, what he really prefers are plain vanilla blue-chip stocks with steady dividends.
Hedge fund manager George Soros said, despite his play in gold, that the precious metal wasn’t a safe bet anymore.
Speaking at a conference sponsored by Reuters, Soros warned while the commodity could go higher, it’s the “ultimate bubble.”
Soros has been calling a gold bubble since the start of the year. Yet, at the same time, he has invested heavily in gold ETFs through the SPDR Gold Trust and in gold mining companies, according to regulatory filings.
Gold prices were up to a new high early Thursday morning, at $1,278 per ouce.
Butn Soros said, in times of economic uncertainty, what he really prefers are plain vanilla blue-chip stocks with steady dividends.
Wednesday, August 11, 2010
Gulf funds may rescue the West
by Tom Arnold
The deep pockets of Gulf sovereign wealth funds (SWFs) could be an increasingly important source of funding for western economies facing spending cuts in the new era of austerity.
Projects in Europe may become more financially attractive for the region’s government investment vehicles as austerity measures by EU governments depress market valuations, said Dr Alexander Mirtchev, the founder and chairman of the US economic consultancy Krull.
“These SWFs are starting to look increasingly as the premier source of available financing for a cash-starved international financial system,” said Dr Mirtchev, who is also an independent director of the Kazakhstan SWF Samruk-Kazyna.
“The Gulf SWFs can underwrite the autonomy of states by acting as an insurer of last resort – in other words, a buffer against global crises and cyclical development.”
SWFs could become increasingly accepted as investors in the US and Europe, as the spending capacity of western governments remains constrained by the need to cut bulging budget deficits, he said.
Policymakers in the UK, Japan, Greece and Ireland are already cutting their spending to reduce public debt.
Globally, the wealth of SWFs is expected to grow to more than US$6 trillion (Dh22.03tn) next year from nearly $4tn now, with signs of increased activity already emerging after the global financial downturn.
The Abu Dhabi company Aabar Investments’s purchase of a 4.9 per cent stake in UniCredit, Italy’s largest bank, and Qatar Holding’s £1.5 billion (Dh8.3bn) purchase of the luxury London department store Harrods are recent examples of investment funds from the region buying European assets.
But barriers to the investment vehicles having their pick of projects in the US and EU remain. A tendency towards protectionism and concerns about foreign ownership of domestic assets are likely to be among the hurdles SWFs face, Dr Mirtchev said. More significant, perhaps, were lingering suspicions about the role and intentions of the investment vehicles, he said.
Suspicions arose in 2006 when plans by then-US president George W Bush to allow Dubai’s DP World to operate some US ports was met with opposition from many US politicians.
“Gulf and other SWFs continue to be subject to uncertainty and even outright suspicion, and considered as policy tools for their own governments,” Dr Mirtchev said.
“The new, mature Gulf SWFs are better positioned to counter such arguments.”
The region’s SWFs have made significant strides to improve their transparency and accountability practices in recent years.
In addition to subscribing to the Santiago Principles – a voluntary code of practices agreed to in 2008 by global SWFs including those from Abu Dhabi and Kuwait – the Abu Dhabi Investment Authority and Mubadala Development have won plaudits for their efforts to increase transparency and disclosure.
There was also a need for Gulf investment vehicles to improve their awareness of the political risks sometimes inherent in investments.
A global investment survey by the World Bank’s Multilateral Investment Guarantee Agency (MIGA) last year found an inadequate anticipation of political risk among investors from the Arab world, with a common problem being the absence of insurance schemes to manage this category of risk.
Regulatory restrictions, breaches of contract, terrorism, war and civil disturbances are deemed political risks by the World Bank.
“This points to the fact that work still needs to be done to address the knowledge gap that exists on the investor side when it comes to risk mitigation insurance,” said Stephan Dreyhaupt, the head of the research and knowledge group at MIGA. The pitfalls Gulf investors could face abroad were illustrated last week when a judge in the UK ruled in favour of the UK developer CPC Group in its court action against Qatari Diar Real Estate Investment. CPC sued the property investment arm of Qatar’s sovereign wealth fund over an aborted agreement to build luxury apartments in London.
The deep pockets of Gulf sovereign wealth funds (SWFs) could be an increasingly important source of funding for western economies facing spending cuts in the new era of austerity.
Projects in Europe may become more financially attractive for the region’s government investment vehicles as austerity measures by EU governments depress market valuations, said Dr Alexander Mirtchev, the founder and chairman of the US economic consultancy Krull.
“These SWFs are starting to look increasingly as the premier source of available financing for a cash-starved international financial system,” said Dr Mirtchev, who is also an independent director of the Kazakhstan SWF Samruk-Kazyna.
“The Gulf SWFs can underwrite the autonomy of states by acting as an insurer of last resort – in other words, a buffer against global crises and cyclical development.”
SWFs could become increasingly accepted as investors in the US and Europe, as the spending capacity of western governments remains constrained by the need to cut bulging budget deficits, he said.
Policymakers in the UK, Japan, Greece and Ireland are already cutting their spending to reduce public debt.
Globally, the wealth of SWFs is expected to grow to more than US$6 trillion (Dh22.03tn) next year from nearly $4tn now, with signs of increased activity already emerging after the global financial downturn.
The Abu Dhabi company Aabar Investments’s purchase of a 4.9 per cent stake in UniCredit, Italy’s largest bank, and Qatar Holding’s £1.5 billion (Dh8.3bn) purchase of the luxury London department store Harrods are recent examples of investment funds from the region buying European assets.
But barriers to the investment vehicles having their pick of projects in the US and EU remain. A tendency towards protectionism and concerns about foreign ownership of domestic assets are likely to be among the hurdles SWFs face, Dr Mirtchev said. More significant, perhaps, were lingering suspicions about the role and intentions of the investment vehicles, he said.
Suspicions arose in 2006 when plans by then-US president George W Bush to allow Dubai’s DP World to operate some US ports was met with opposition from many US politicians.
“Gulf and other SWFs continue to be subject to uncertainty and even outright suspicion, and considered as policy tools for their own governments,” Dr Mirtchev said.
“The new, mature Gulf SWFs are better positioned to counter such arguments.”
The region’s SWFs have made significant strides to improve their transparency and accountability practices in recent years.
In addition to subscribing to the Santiago Principles – a voluntary code of practices agreed to in 2008 by global SWFs including those from Abu Dhabi and Kuwait – the Abu Dhabi Investment Authority and Mubadala Development have won plaudits for their efforts to increase transparency and disclosure.
There was also a need for Gulf investment vehicles to improve their awareness of the political risks sometimes inherent in investments.
A global investment survey by the World Bank’s Multilateral Investment Guarantee Agency (MIGA) last year found an inadequate anticipation of political risk among investors from the Arab world, with a common problem being the absence of insurance schemes to manage this category of risk.
Regulatory restrictions, breaches of contract, terrorism, war and civil disturbances are deemed political risks by the World Bank.
“This points to the fact that work still needs to be done to address the knowledge gap that exists on the investor side when it comes to risk mitigation insurance,” said Stephan Dreyhaupt, the head of the research and knowledge group at MIGA. The pitfalls Gulf investors could face abroad were illustrated last week when a judge in the UK ruled in favour of the UK developer CPC Group in its court action against Qatari Diar Real Estate Investment. CPC sued the property investment arm of Qatar’s sovereign wealth fund over an aborted agreement to build luxury apartments in London.
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