Sovereign Wealth Funds and their Impact - Part 3

 

Part 3 – Singapore and a few more prominent SWFs

"Returns matter a lot. It's our capital." — Abigail Johnson

SWF of Singapore

Singapore is similar to Norway in terms of population. However, unlike Norway, it is a small area being a city-state. Also, unlike Norway, Singapore is not a resource-based economy. The foundation of Singapore is Trade and Logistics. It has the second-largest container port in the world in terms of traffic and has a well-developed financial market.

GIC Private Limited is the sovereign wealth fund established by the Government of Singapore in 1981 to manage Singapore's foreign reserves. Its mission is to preserve and enhance the international purchasing power of the reserves, with the aim to achieve good long-term returns above global inflation over the investment time horizon of 20 years. GIC invests internationally in developed market equities, emerging market equities, nominal bonds and cash, inflation-linked bonds, private equity, and real estate. The Sovereign Wealth Fund Institute (SWFI) had estimated the fund's assets at US$440 billion.

In addition to GIC, the Government of Singapore owns another fund, Temasek Holdings, which manages about SGD$308 billion of assets. GIC and Temasek both have different mandates and serve different purposes. GIC is a sovereign wealth fund, with a mandate to preserve the purchasing power of SGD, hence their investments are limited to non-local companies. Temasek, on the other hand, is an asset management company, with its roots traced back to the GLC period where Temasek financed and managed companies such as SingTel, SIA, and Wildlife Reserves. Thus it had investments within Singapore. Things changed when the underlying held companies went international. Subsequently, Temasek also started investing overseas. Today it resembles an SWF since most of its investments now are overseas.

It is widely believed that the actual size of the SWF (GIC) is much larger than the figures put out by the SWF Institute. GIC does not disclose the amount of funds it manages and its annual profit and loss. The reason is that revealing the exact amount would expose the full size of Singapore's financial reserves and make it easier for speculators to attack the Singapore dollar during periods of vulnerability. Most experts estimate the SWF to be 50 to 70% larger than the SWF Institute. It is considered to be one of the most sophisticated and influential sovereign wealth funds globally. Along with the Abu Dhabi Investment Authority (ADIA) and Norway’s Government Pension Fund Global, it is one of the most closely watched, admired, and emulated sovereign fund in the world.

The mandate undergoes major overhauls every decade, the last one being around 2012. The 2012 investment review brought about a change in approach from before. GIC now considers six core asset classes: nominal bonds and cash; inflation-linked bonds; developed market equities; emerging market equities; real estate; and private equity. Then there are a host of about 20 strategies that are laid over those asset classes. Broadly, GIC works on an overall risk profile that it thinks is appropriate in order to generate good long-term returns over global inflation

Although it is not publicly known how big GIC is, it is certainly big. Therefore, we also do not know its exact asset allocation. For example, it is one of the largest real estate managers in the world, despite the fact that real estate should only represent 8% to 13% of the portfolio. Therefore, it is unlikely that its allocations in some asset classes are as high as GIC would like them to be.

A large proportion of GIC’s investments are not made directly by it. Rather, it maintains relationships with many large private equity funds and deploys capital with them to be invested. GIC also does not have too much redemption pressure because the Singapore economy continues to be vibrant and the country runs budgetary surpluses most of the time. For the moment, GIC invests without much concern about funds being taken away from them; there has only really been one drawdown from the past reserves pool to which GIC contributes, during the global financial crisis, for a national resilience package in 2009. It is rare and not a regular occurrence.

In 2008, GIC published for the first time a report containing information on its 20-year returns and more information on how it is managed and governed, and how it invests Singapore's foreign reserves.

Since 2011, GIC had also published the 5-year and 10-year nominal rates of return to provide a sense of the ongoing medium-term investment performance, even while GIC maintains its sights on the long term. It included two composite portfolios and volatility statistics to reflect the level of portfolio risk and to offer perspective in reading the 5-year and 10-year figures.

GIC’s long-term return – its main performance metric is a 20-year annualized return – was 3.4% above global inflation up to March 31, 2018. This is not exceptional and well below the almost 6% it stood at in 2001. It is not an easy target to meet and one can expect increasing allocations to emerging markets in order to step up the returns.

Japan

There are sovereign funds that do not fit into the classic definition, mainly because they are investing in their home countries too. They serve the same purposes. The most prominent one is the one in Japan. It is a very important fund, classified as a pension fund. Japan has an aging population with over 28% of its population being elderly (> 65 years of age). The pension fund is an important vehicle for the Japanese economy to invest for future requirements.

The Government Pension Investment Fund Japan (GPIF) is a Public Pension located in Tokyo, Japan. Current Assets for GPIF is USD 1.6 trillion. The GPIF contributes to the stability of the Employee's Pension Insurance and National Pension programs.

Understanding the Government Pension Investment Fund

The GPIF invests in a mix of domestic and international stocks and bonds, as well as FILP bonds. A large amount of the GPIF's assets are invested with external money managers, who are selected and monitored by GPIF managers. Only a small portion of the assets in the domestic bond category is invested by in-house investment managers. The majority of the GPIF's assets are allocated to passive investment funds that seek to mirror the returns of a market index within each asset class.7

The objective is to achieve the investment returns required for the public pension system with minimal risks, solely for the long-term benefit of pension recipients. The primary investment strategy is diversification by asset class, region, and timeframe. Investment returns should be more stable and efficient by operating on a long-term investment horizon, while at the same time securing sufficient liquidity to pay pension benefits. The GPIF formulates the policy asset mix and manages and controls risks at the levels of the overall asset portfolio, each asset class, and each asset manager. It employs both passive and active investments to benchmark returns set for each asset class, while seeking untapped profitable investment opportunities.

For fiscal 2018, foreign equities were the top-performing asset class for Japan’s GPIF, returning 8.12%, followed by foreign and domestic bonds (by a long way), which returned 2.7% and 1.4%, respectively. The worst-performing asset class for the fund was domestic equities, which lost 5.09% for the year. Japan’s GPIF also reported that its annual rate of return has been 3.03% since fiscal 2001, bringing in cumulative returns of 65.82 trillion yen, which is more than 41% of its current total asset value.

The asset allocation for the fund as of today is reported as -

• ·         Domestic Bonds - 26.61%
• ·         Foreign Bonds - 23.46%
• ·         Domestic Equities - 24%
• ·         Foreign Equities - 25.88%

ADIA - UAE

The Abu Dhabi Investment Authority was established in 1976. It is designed to be a long-term fund that would utilize the fossil fuel surplus to build future income for its citizens. “ADIA’s mission, enshrined in law since 1976, ensures that we look beyond market cycles and fluctuations to focus on long-term trends that will generate sustainable returns. This long-term approach is central to everything we do; from the importance we place on building relationships to our commitment to educating and developing our people” – ADIA website.

UAE is a rich country. Its economy is of the order of USD 4.4 billion, on a population base of 9.6 million. Abu Dhabi is the largest of the seven emirates that comprise the UAE, in terms of both its land mass and economy, and home to the majority of the country’s energy production and reserves. According to Statistics Centre - Abu Dhabi (SCAD), the emirate’s economy expanded at a rate of 31.7% in 2005 and 32.3% in 2011 in nominal terms. During subsequent years, as oil prices dropped, Abu Dhabi’s economy remained resilient, growing by 9.5% in 2017 (for example). However, the budget surplus era was over by then. During the last 2-3 years UAE has pulled back into budget surplus, but the future remains challenging because of the impact of COVID19 on the global economy. In spite of attempts to diversify, Oil & Gas continue to contribute to 35-40% of the economy.

The ADIA sovereign wealth fund ranked as the third-largest in the world in 2019 with USD 697 billion in assets. It is one of the world's largest institutional investors. The wealth managed by the ADIA is sourced primarily from Abu Dhabi's large oil reserves. The ADIA is secretive, and hence not much is known about its investment methodology or portfolio of holdings. However, some of the information that they do share, have suggested that fund has performed reasonably well. In USD terms, the 20-year and 30-year annualized rates of return for the ADIA portfolio were reported to be 5.4% and 6.5% respectively. This was reported in 2018.

Other prominent SWFs in the Arab world

Kuwait Investment Authority, Kuwait – USD 592 billion - The Kuwait Investment Authority (KIA) is the oldest SWF in the world, tracing its roots back to the establishment of the Kuwait Investment Board in 1953. The organization was set up to invest oil surplus revenues and reduce Kuwait’s reliance on oil reserves and allow “future generations to face the uncertainties ahead with greater confidence.” The KIA also manages the General Reserve Fund (GRF).

SAMA Foreign Holdings, Saudi Arabia – USD 506 billion - SAMA Foreign Holdings was established in 1952 as an investment arm of the Saudi Arabian Monetary Authority (SAMA), part of the Central Bank of Saudi Arabia. The fund was established to manage Saudi Arabia’s large oil surpluses and support the country’s budgetary needs. SAMA Foreign Holdings investment strategy differs from the PIF (another SWF of KSA) as it focuses heavily on cautious fixed-income investments, such as sovereign debt instruments, and particularly US treasury bonds.

Public Investment Fund, Saudi Arabia – USD 320 billion - Established in 1971, the role of the PIF has changed significantly since the introduction of Saudi Arabia’s Vision 2030 in April 2016. Vision 2030 envisions the fund controlling more than $2 trillion in assets. Since the plan calls for the PIF to become a massive investment vehicle to help move the Kingdom away from its historic reliance on oil revenue, the fund has made big moves to diversify its investments. The PIF is invested in many large projects and institutions, such as the Blackstone Infrastructure Fund, Virgin Galactic, and the Softbank Vision Fund.

 

Qatar Investment Authority, Qatar – USD 320 billion - Founded in 2005 by the State of Qatar, the Qatar Investment Authority (QIA) was established to develop, invest and manage the state’s reserve funds and other assets. The SWF’s mission is to create long-term value for Qatar and support the country’s economic diversification initiatives.

Investment Corporation of Dubai, UAE – USD 240 billion - The Investment Corporation of Dubai (ICD) is the principal investment arm of the government of the UAE emirate Dubai. ICD was established in 2006 and consolidated the emirate’s existing portfolio of commercial companies and investments. The SWF is aiming to further Dubai’s presence globally and “enhance Dubai’s economic prosperity for future generations.”

Mubadala Investment Company, UAE – USD 229 billion - Mubadala Investment Company was established in 2017 as the result of a merger between Mubadala Development Company and the International Petroleum Investment Company, both founded by the government of Abu Dhabi to channel oil funds into developing the economy.

There are many more SWFs. Some have recently started and haven’t attained a large size yet. The key takeaway is that SWFs (and PPFs) will continue to grow, particularly because many OECD countries are facing an era of low growth and ageing populations. Further, the world has been in an era of very low interest rates and will remain there for some time to come. This makes it difficult for SWFs and PPFs to meet their targeted returns without diversifying their investment portfolio further. The “safe” investments of fixed incomes are unlikely to do the job. Therefore, flows to emerging markets and “frontier markets” will increase. It is here that India gets its opportunities. The Indian economy is in a demographic sweet spot, the economy is large and mature, and in most likely scenarios is heading for many years of sustained decent growth. This makes it attractive for SWFs, and we will explore this angle in the next part of this series.

"In investing, what is comfortable is rarely profitable." — Robert Arnott

Part 1 – What are Sovereign Wealth Funds

Part 2 - The story of the Norwegian SWF and The SWF of China

Part 3 – Singapore and a few more prominent SWFs 

Part 4 – India as a prominent destination for SWFs