How sovereign wealth funds are innovating

Amanda White

By

13/12/2016

How to navigate difficult investment markets, bypass external asset managers, and mitigate climate change risks were hot topics of conversation when sovereign wealth fund executives from 28 countries descended on Auckland, New Zealand in November.

The International Forum of Sovereign Wealth Funds (IFSWF) is a volunteer organisation formed in 2009 by 23 state-owned global investors. IFSWF was established with the aim of maintaining an open and stable investment climate by setting and following a set of guidelines and practices – known as the Santiago Principles – to improve standards in institutional governance and risk management.

At the event, all 28 funds in attendance shared a self-assessment on transparency and governance, which informed discussions.

Collectively the participants are responsible for upwards of $US 2 trillion (nearly $3 trillion) in assets under management.

Australia’s own $143 billion Future Fund revealed it had recently asked the federal government to consider lowering its stated return objective, in the face of forecasts for a prolonged period of low rates and sluggish growth.

“In the build phase the government wanted a real return of 5 per cent. We have begun engaging with government about their expectations,” Future Fund managing director David Neal said.

“This is critical as the board is looking for guidance, and we will have to increase risk or reduce the return target.”

The Future Fund’s return target was set when it was seeded in 2006, prior to the global financial crisis and ensuing years of extraordinary international monetary policy that is now drawing to a close.

 

What CIC and bcIMC are doing

Sovereign wealth funds all around the world are struggling to adapt in response to the challenging market outlook.

The China Investment Corporation (CIC) detailed some of the changes it is making, including improvements to its asset allocation framework.

CIC’s longstanding chief investment officer Li Keping, who is now a senior adviser to the fund after retiring last year, said more decision making power has been delegated down the chain to individual portfolio managers.

“We have given them more room if they have the ability,” he said.

CIC has also built out its capability in private equity, both internally and in its network, to co-invest and go direct.

British Columbia Investment Management Corporation (bcIMC) chief executive and chief investment officer Gordon Fyfe said more sovereign wealth funds should take this approach to better exploit the advantages of holding patient, long-term capital.

“One of the competitive advantages we have is we have a large balance sheet, and economies of scale allow us to build big internal teams,” he said.

“We also have very long term time periods, so we never have to sell an asset unless it’s at our choosing.”

Fyfe questioned why most sovereign wealth funds continue to invest heavily in equities.

“We don’t need the liquidity. Why aren’t we looking for opportunities to invest higher up the capital stack and take advantage of that?” he said.

 

Collaboration on the rise

Although he warned of the need to reduce the costs associated with private market manager fees.

“Paying 3 to 5 per cent per year might be okay when returns are 25 per cent, but when they are 9 to 12 per cent, it makes a big difference,” he said.

“Start a new fund with experienced people who you can back and negotiate better terms. Or you can co-invest.”

Since Fyfe joined bcIMC that fund has co-invested with Singapore’s sovereign wealth fund GIC on infrastructure and real estate deals. He previously headed PSP Investments, one of Canada’s largest pension funds, when it co-invested with New Zealand Super in Kaingaroa Forest.

Fyfe said one of the big attractions of attending events like IFSWF was the chance to meet potential co-investors.

For the first time the risk and opportunities associated with climate change featured firmly on the 2016 IFSFW program.

New Zealand Super chief investment officer Matt Whineray said the fund has been implementing a strategy to make its portfolio more resilient to climate risks.

“These are risks that are not properly priced or fully compensated. They are ‘undue’ risks and our mandate requires us to manage undue risks,” he said.

New Zealand Super chief executive Adrian Orr, who is also IFSWF chair, flagged the peak body plans to commission new research into how sovereign wealth funds can make their portfolios more resilient to climate change risks.

 

Amanda White is the director of institutional content for Conexus Financial and the editor of Top100Funds.com. She will chair a session on how to build an effective superannuation organisation with AustralianSuper chief executive Ian Silk at the Investment Magazine Chair Forum in Healesville Victoria, January 29-31, 2017. Register at chairforum.com.au or contact Emma Brodie via [email protected] or +61 9227 5708. 

 

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