Despite their long-term investment horizon, sovereign wealth investors have to meet short term performance goals. Jean-Michel Bourgoin of Amundi Asset Management, a funds of funds manager speaking at a Pensions & Investments webinar says, “SWFs have to report [performance] on a short term basis so they have to change investment policy [in response to a] crisis.”
For example, the Alberta Investment Management Company is realigning its portfolio and reducing its allocation to hedge funds. The reason for the reduction, says assistant deputy minister Rod Matheson of the treasury and risk management division, is that the new senior leadership at AIMCo does not view hedge funds as a stand-alone asset class but rather as a complement to the equity portfolio.
“Many of the fixed income-based hedge funds have been divested and AIMCo is focusing the portfolio on equity strategies that are significantly uncorrelated to the core equity program,” adds Matheson.
Unlike pensions which have specific funding requirements, says John Reisberg of Lazard Asset Management, SWFs have more flexible asset allocation models they can stick to over a longer period of time.
Sovereign wealth funds have been actively investing in the equity markets for at least a decade, and viewed the earlier part of the 2008 economic crisis as a big investment opportunity. After the subsequent drop in book value of many stock investments, SWFs focused mainly on domestic issues in mid 2008 to mid 2009. “They bailed out their own banks and supported their domestic markets. About 40% of deals were domestic. This is a full reversal of strategy implemented for past 10 years,” says Bourgoin.
In mid to year-end 2009, SWFs regained their appetite for foreign investments as they invested about $50 billion, observes Bourgoin. European and North American investors have increased interest in emerging markets.
Governance
According to SWFs interviewed by Infovest21, some are reviewing their organizational structure.
At the New Mexico State Investment Council, the composition of the board has changed and now includes the governor, state treasurer, commissioner of public lands, secretary for the New Mexico department of finance and administration, the chief financial officer for a state university, four public members appointed by the legislative council and two public members appointed by the governor. The state investment officer reports to the council which has discretion over the hiring of investment consultants. This arrangement provides more oversight of investment decisions. Previously, the state investment officer could decide who to hire.
The Alaska Permanent Fund adopted a new investment policy on May 27, 2010. Board chair Steve Frank says, “The updated investment policy does delegate the board’s authority to authorize the hiring and firing of managers to staff…This change makes sense and is in line with how similar funds operate…The board must first authorize a manager search, but then we leave the hiring of managers to the staff that have the time to conduct due diligence visits and comb through performance data.”
Investment outlook
SWFs are an important part of the capital structure.
“They select the best quality and can afford to select the best quality. Size is important. Location does not matter,” says Bourgoin. “They are very demanding in terms of capacity building, they want to learn. They want a manager who can bring them something new.”
He says that in Asia and the Middle East, developing trust and personal relationships is very important. “Visit them regularly, they have to know you.”
Additional content on SWFs are available in Infovest21'slatest issue of Investor Focus.
Interview with Alberta Heritage Fund and Wyoming Trust
Table of top 10 largest SWFs
Sentiment Indicator: Investors
Sampling: Who’s Who in SWFs
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