Home / Sovereign funds compete for air time in Auckland

(pictured: Adrian Orr)

By David Chaplin

Despite his engaging introductory monologue, Adrian Orr, NZ Superannuation Fund chief executive, faced tough competition for the attention of the 250-plus International Forum of Sovereign Wealth Fund (IFSWF) delegates assembled at the Auckland Viaduct Centre last week.

As Orr rolled energetically through a diversified portfolio of one-liners, NZ history lessons, IFSWF updates and conference housekeeping, large swathes of the audience – collectively responsible for some $5 trillion – were heads-down, staring at the flickering screens of mobile phones.

In a quirk of market timing, his 1.00 pm welcome address coincided with the first presidential election results oozing out of the US, a news-stream that kept the IFSWF crowd diverted from the main stage for the rest of the afternoon.

But away from the unfolding Trump-a-ganza, the IFSWF conference pressed ahead with the main agenda. Following a modestly upbeat review of global fundamentals by renowned economist, John Lipsky, an IFSWF panel tackled the major investment debate of the day – how to make money in a low-return environment.

While Lipsky argued the world economy was potentially on the up, the globally-diverse IFSWF panel – featuring Massimiliano Castelli of UBS Asset Management, British Columbia Investment Management Corporation chief Gordon Fyfe, senior adviser to the China Investment Corporation (CIC) Li Keping, and Tham Chiew Kit, total portfolio strategy head for the Singapore GIS – all touted alternative approaches to counter the downward slide in investment returns.

“Despite being easy to turn to pessimism, the consensus forecasts are not that bad,” Lipsky said. “If we achieved those forecasts with some structural reforms that could set the stage for much more favourable outlook ahead.”

Castelli, UBS head of strategy global sovereign markets, wasn’t so sure.

“Investors are still relatively risk-on,” he told the IFSWF delegates. “… they’re still betting markets will normalise, but I think they’re underestimating the risks.”

According to Castelli, sovereign wealth funds (SWFs) faced four choices in the face of a structurally low-return environment: increase risk – implying an allocation to equities of at least 70 per cent; allocate more to illiquid assets; adopt a more tactical and cyclical investment framework, including taking advantage of market-timing events such as the US election; and, implementing alternative portfolio construction techniques or “moving towards being like a hedge fund”.

He said the latter two options probably offered greater upside potential for SWFs but would require most to implement “massive organisational change”.

Similarly, GIC’s Chiew Kit said SWFs faced a range of choices when managing risk in the low-return world. He said funds could dial risk either up or down or “rotate” between risks opportunistically.

However, Chiew Kit said SWFs might consider two further strategies – “expanding bottom-up alphas” or “keeping their powder dry ” to snap up distressed assets during market dislocations.

He favoured a focus on generating bespoke alpha, which involved “beefing up” both the in-house management teams and external managers. SWFs were uniquely-placed to take advantage of both volatility and idiosyncratic bottom-up alphas, Chiew Kit said, given their long-term investment focus and, usually, stable pools of capital.

Keping said the CIC was also adopting a more targeted approach to asset allocation, freeing up both in-house and external managers to pursue higher returns while the fund controlled the overall risk tolerance.

He said CIC was building the investment model in-house while networking with external managers to take advantage of the fund’s access to the Chinese economy and cross-border opportunities.

“We’re focused on our comparable advantages and the comparable advantages of our network of managers,” Keping said.

Fyfe agreed SWFs needed to play to their competitive advantages of “big balance sheets” and long-term liabilities. For example, he questioned whether SWFs needed to own publicly-listed equities.

“We don’t need the liquidity,” Fyfe said. “Why not invest higher in the capital stack and take advantage of that?”

He said there were plenty of opportunities for well-connected SWFs to pick up quality assets at discount prices with “most of the exciting stuff happening in the distressed space”.

The British Columbia fund, for instance, had recently acquired a pipeline in Brazil during the recent downturn there while also purchasing virtually new bulk carrier ships “for 50 cents in the dollar”.

While SWFs needed to do a lot of work to understand the assets in question, Fyfe said the approach can “make a real difference to portfolios”.

He said SWFs could view market shocks as advantageous – within limits.

“Bad is good,” Fyfe said. “Or bad is good if it just goes on for one to two years but if it goes on for three to four years then bad is just bad.”

As delegates absorbed the Trump election shock at least a few SWFs at the Auckland conference were no doubt following the ‘bad is good’ mantra – buying the big dips of the day.

However, the IFSWF itself was sticking to its long-term goals of spreading the investment best practice word – based on the eight ‘Santiago Principles’ laid out in the 2009 founding document – among the current 28 members.

Orr, who also chairs the IFSWF, said after eight years building the guidelines and network the organisation was now ready to ramp up activities.

He said the group was committed to building the Santiago Principles into the investment transparency and accountability standards “the rest of the world measures itself against”.

As well as launching a new website, including a range of fund case studies, Orr said the IFSWF would continue to invest in its London-based secretariat, headed by Duncan Bonfield.

As well as continuing to focus on governance, over the coming year the IFSWF says in a statement it would “explore the investment implications of the global commitment to curb greenhouse gas emissions for sovereign wealth funds”

A working group would report back on the climate change research project at next year’s IFSWF conference slated for Astana, capital of the oil and mineral-rich central Asian state of Kazakhstan.

– Investment News New Zealand