Big Fish, Small Pond?
It’s the scenario that Bank of England economist Andrew Haldane last year termed the Big Fish Small Pond problem — the prospect of rising global investor allocations swamping the relatively small emerging markets asset class.
But as of now, the picture is better described as a Small Fish in a Big Pond, Morgan Stanley says in a recent study, because emerging markets still receive a tiny share of asset allocations from the giant investment funds in the developed world.
These currently stand at under 10% of diversified portfolios from G4 countries even though emerging markets make up almost a fifth of the market capitalisation of world equity and debt capital markets. In the case of Japan, just 4% of cross-border investments are in emerging markets, MS estimates.
But change is on its way. MS surveys show most classes of global institutional investors intend to boost allocations to emerging markets, including the more conservative investor groups – Japan’s $1.3 trillion government pension insurance fund, for instance, plans to start buying emerging equities later this year. MS analysts calculate allocations to emerging markets could rise 3.5% over the next five years.
That may not sound like much until one realises the true scale of the global pool of investable institutional assets and compares them with current market cap values in developing countries . These assets currently exceed $212 trillion, meaning a 3.5 % allocation increase will bring over $2 trillion into emerging markets. That’s over half the capitalisation of EM equity market, more than 80% of bond markets and a third of the combined market cap of both sectors.
Take a look at some more numbers:
– Based on current market values, a 1% increase in allocation to EM by pension and insurance funds represents a $524 billion flow to EM assets.
State vs entrepreneurial capitalism
The post-crisis world has been in part shaped by the growing presence of sovereign wealth funds, which have become an important source of funding with their $4 trillion assets, replacing private equity and hedge funds. But some people are wondering whether state capitalism really is the way forward, to boost the potential growth rate of the post-crisis world.
Robert Litan, senior fellow at the Brookings Institution, believes that in fact it’s entrepreneurs who would play a key role, and it’s important for policymakers to come up with a mechanism to help them.
Litan estimates that the United States needs 30-60 new “home-run” firms a year with annual sales of $1 billion to boost U.S. growth rate by one percentage point beyond its post-war average of 3 percent. This is double the past 150-year average of 15 firms a year.
“Enterpreneurial capitalism is the defining concept of 21st century economics. The state firm model might work for countries that are behind, but at some point we need entrepreneurship,” Litan told a briefing hosted by Legatum Institute, an independent public policy think tank.
Litan, who is also vice president for research and policy at Ewing Marion Kauffman Foundation, says “crowd funding” is one innovative way to help entrepreneurs.
Currently popular with film, tech and art start-ups, crowd funding is a new capital-raising technique that allows investors to take small equity stakes in new firms over the Internet.
How socially responsible is your investing?
Is your investment ethically sound and socially responsible?
A new survey by consulting firm Mercer finds that only 9% of more than 5,000 investment strategies achieve the highest environmental, social and governance (ESG) ratings.
Socially responsible investing (SRI) involves buying shares in companies that manage ESG risks. For example, firms that make clean technologies are favoured, while businesses which pollute the environment, are complicit in human rights abuses or nuclear arms production are shunned. All this sounds good, but the performance of such investments has been somewhat mixed — meaning being good doesn’t always mean doing well. But the SRI industry is hoping that greater involvement of funds, especially long-term ones such as pension funds and sovereign wealth funds — may generate flows into the sector and lead to better performance.
Of the 5,175 strategies assigned ESG ratings, 57% are in listed equities, 20% fixed income and the remaining 23% across real estate, private equity, hedge funds and others.
Private equity has the highest proportion of highly rated ESG strategies, while hedge funds and fixed income had the fewest. From a geographic perspective, emerging markets and Asia-Pacific have the highest proportion of top ratings, while Canada — and this may come as a surprise to some — has the least.
Irish SWF: Died Nov 2010 aged 9
National Pensions Reserve Fund, born April 2001, died November 28th, 2010; survived by a sister, Nama.
Irish Times wrote today an obituary for Ireland’s sovereign wealth fund NPRF, which was originally set up at the start of the last decade to plug future pension shortfalls.
But it never lived to fill this purpose. The 25-billion euro NPRF, which boasts its membership to the world’s elite SWF club, has died a sudden death although it has been suffering a capital haemorrhage last year, when the government amended the rule and used 7 billion euros to recapitalise its battered banks. The grim fate of NPRF also raised concerns about the viability of long-term capital: after all, sovereign wealth funds were billed as a provider of global financial stability as they invest in risky assets in the long-term.
“From its birth, however, there were fears that the fund would flirt with potentially disastrous investments, such as dotcoms, which were fashionable at that time. Indeed, the decision to require the fund’s managers to engage in stock-picking rather than simply acting as a passive “index fund” tracking the whole investment market served to push up costs,” the paper wrote.
“The State’s distinct lack of an ethical investment policy also proved controversial – tobacco vendors Philip Morris, Imperial Tobacco and British American Tobacco; cluster bomb makers such as Lockheed Martin, Raytheon and Thales; and Iraq war profiteer Halliburton were among its hottest stock picks.”
The NPRF suffered a fatal blow on November 28 when the government directed around 10 billion euros of the fund’s capital to prop up “black hole” banks.
I think that this is a very one sided article.
We all know that property values move in cycles and the investments by the Irish National Pensions Reserve Fund in the largest property in Europe, if not in the world, will eventually come around. It is the original developers who will lose out because their equity will not ever recover enough to overtake the continuing interest charges. These interest charges will accrue to the NPRF.
Also remember that they have taken preference shares in the two irish banks and these too will recover in time and generate a capital gain as well as a return of the loan funds.
State funds and environmental investing
An Australian local government superannuation fund has become the latest state-owned fund to invest in environmental funds.
Local Government Super (LGS), which manages around A$6 billion in assets for 100,000 local government employees in New South Wales, has invested A$50 million ($45.96 million) into a portfolio which invests in small cap environmental technology stocks, run by London-based Impax Asset Management.
The portfolio will follow an investment strategy followed by one of Impax’s fund, which returned 47.71 percent in the last five years, versus 20.10 percent for the benchmark MSCI World Index.
A greater involvement by state-owned funds would give a boost to the Socially Responsible Investing industry, which has so far failed to give convincing returns (obviously Impax’s fund above looks like an exception).
As analysed here, investing in ethical investing serves a multitude of objectives, especially for sovereign wealth funds keey to be accepted in the West.
- seek long-term, uncorrelated returns via non-traditional asset
- do social good
- gain wider acceptance among critics who suspect they operate politically
- enhance transparency and accountability by giving clear ethical guidelines
The government imposes contribution limits on all types of IRA. The Roth IRA Contribution Limit rules can change. It is essential that you review this, at the beginning of each new financial year. This will ensure you understand the maximum dollar amount you are allowed to deposit in your IRAs for that year.
Roth IRA
http://rothiracontributionlimit.com/
SWFs climbing the German wall
The Vale Columbia Center on Sustainable International Investment’s latest report on foreign direct investment looks at inward flows to Germany. Things look like they were a bit better last year than the year before, apparently.
But buried in the report from Aschaffenburg University economist Thomas Jost is some interesting data regarding sovereign wealth funds.
In April last year, Germany responded to concerns about the influence of sovereign wealth funds by introducing rules allowing for a review of planned acquisitions by non-EU/EFTA foreign companies and SWFs of existing German companies.
According to the Federal Ministry of Economics and Technology, pace Jost, between the introduction of the rules and May this year, 34 companies applied for so-called certificated of non-objection. All got their approval within an average of two weeks and none were referred for a special review.
So on the face of it, the law has not stopped inward FDI into Germany, but there are questions that need to be answered. How many of the 34 applicants were sovereign wealth funds? How much have the rules put SWFs and other companies off? As Jost puts it:
Despite the rather positive experiences with the new law so far, this more restrictive investment law could send a wrong signal to potential foreign investors.
There’s oil in them thar wealth funds
Some interesting new data on sovereign wealth funds from State Street Global Advisors, a huge fund firm that does a lot of business with them. Most interesting, perhaps, is that the vast majority of sovereign wealth fund money comes from oil and gas revenues rather than from countries building up large foreign reserves from other trade, eg China.
- – The U.S. firm identified 37 major sovereign wealth funds worth a total of $3 trillion.
- – More than two-thirds, or 70 percent, of that money came from oil and gas interests.
- – Of the 37, all had at least $3 billion in assets.
- – Eight of them had more than $100 billion.
- – Only 13 of the 37 funds were not based on commodity wealth.
- – Asia had the largest number of SWFs at 13.
- – The 10 funds based in the Middle East had nearly half the wealth, or 46 percent, between them.
These funds, incidentally, are becoming more like mainstream investment companies by the day. State Street says they are eventually going to turn into the equivalent of large public sector pension funds and could well start becoming more active as shareholders in companies in which they invest.
The “Oxford Sovereign Wealth Funds Project,” Oxford University, discussed the analysis of SWF post-crisis investment strategies and the views of the growing trend of cooperation between them. According to comments by Dr. Alexander Mirtchev, the increased strategic cooperation between SWFs in emerging markets reflects the potential advantages that SWFs achieve in pursuing such strategies. Just like multinationals, in certain industry sectors SWFs are able to achieve more, as they may not be bound by anti-trust and other restrictive regulatory policies. In addition, joint project development allows better structuring of the investment activities of SWFs, making them a more desired and systemically important investor, in particular in the context of global economic security after the crisis.
A black swan in the desert
Just when investors were settling down to lock in a few of the year’s profits and put their feet up for the end of the year holidays, a black swan has come waddling out of the desert to put everything on edge.
The unwelcome cygnus atratus came in the form of Gulf emirate Dubai telling creditors of Dubai World and property group Nakheel that debt repayments would be delayed. Fears of contagion spread widely, hitting world stocks, lifting the dollar out of its basement and driving demand for European debt so much that a roughly 6-month trading range for futures was breached.
It all may settle down soon. Dubai says the problem does not apply to its big international ports group. Meanwhile, the emirate is a pretty leveraged place, but fellow emirates and neighbouring countries such as Abu Dhabi, Qatar and Saudi Arabia are pretty flush with cash. They could even step in to help as a matter of solidarity.
At least for now, though, it is showing just how interlinked everything is. Ok, of course, banks get hit when people worry about expsosure. But who would have thought that a European car company would get clobbered by a debt problem in the Gulf?
The issue is those sovereign wealth funds that have been recycling their country surpluses into investments elsewhere. Qatar owns 10 percent of Porsche, Abu Dhabi and Kuwait own 17 percent of Daimler between them. So it is not just investors worrying about their money in the region, it is investors also worrying about where the region’s money is.
Is country risk taking on a new meaning?
Investing is getting very complicated with the intervention of sovereign funds. Once something goes wrong in their countries, they will liquidate assets and update the regional stock markets.I think if those rulers in Middle East are smart, they will step in to snap up the bargains after those overseas investors pull out of the market.
from MacroScope:
Chile, Singapore among most transparent SWFs
Chile, UAE, Singapore, Azerbaijan, Ireland and Norway claim top rankings on the latest transparency index, published by SWF Institute. At the bottom of the ranking is Venezuela, Oman, Nigeria, Mauritania, Kiribati, Iran, Brunei and Algeria.
The Linaburg-Maduell index is calculated with 10 principles -- such as whether the fund provides up-to-date, independently audited annual reports, or whether it provides clear strategies and objectives. It also gives points on whether the fund gives ownership percentage of company hodlings, total market value, returns and management compensation.
Enhancing transparency is a key task for sovereign wealth funds, whose often opaque operations have come under heavy criticism by some Western politicians who suspect them of investing with political, rather than commercial, motives.
In fact in the recent meeting of the world's leading sovereign wealth funds, only Norway, Chile, New Zealand agreed in advance to speak to Reuters on the sidelines; when contacted on the ground China also spoke. Others either declined to comment at all or did not return email.
(Source: SWF Institute; www.swfinstitute.org)
from MacroScope:
Australia’s SWF lags in returns
Australia's Future Fund reveals that the fund's mixed asset portfolio (excluding Telstra holding) returned 5.6 percent in the third quarter.
The fund has just over 10 percent in Australian equities, 22.8 percent in global equities. Safer instruments dominate, with debt holdings at 24 percent and cash at 31 percent.
The mixed-asset fund significantly underperforms an equity-only portfolio. For example, the MSCI world equity index has risen more than 17 percent in the Q3 alone.
The Future Fund is a rare SWF which reports results quarterly, like a public-listed firm. The underperformance might outrage the public though -- so is this worth it?
Recall remarks last month by David Murray, the fund's chairman of the board of guardians , which highlighted some downsides in reporting quarter after quarter.
"We are happy to report but it does create some significant difficulties. If forces the community to take very short term views in returns in the fund and causes management of the fund to be concerned about media and community responses," he said at a SWF meeting in Azerbaijan earlier this month.
