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SWFs under Pressure: No Panic Selling Yet

September 15, 2015

panicRichard Teitelbaum has written a fascinating piece for Institutional Investor on the contemporary pickle in which sovereign wealth funds find themselves. He calls it a “triple threat” but really emphasizes only two treats out of the three within his canvas.

Abstractly put, SWFs are under pressure from three different directions: first, many of them are carbon-fuel based, and the collapse in oil prices has been a big hit. Teitelbaum doesn’t seem to think this is a biggie, though. “[T]here is little or no panic selling of illiquid assets and, with a couple of notable exceptions, like Russia’s pension fund, few blatant violations of the rules on disbursements of funds….”

Second, and more pressingly, recent months have seen “a spell of wild currency swings; including a 13 percent drop in the euro vis-à-vis the dollar over the 12 months through late August.” There was also the matter of the Swiss franc, etc.

Politicians and Snowballs

Third, and another “snowballing trend”: sovereigns are looking over the shoulders of their sovereign wealth funds. The SWFs used to be semi-autonomous fiefdoms. That is so no longer. This means “social responsibility” mandates, among much else, and mandates imposed in ways that can hurt. Norway recently informed its Government Pension Fund Global that the GPFG won’t be allowed any longer to invest in coal. There is also political pressure on it to sell its stock in Coca-Cola.

On the other side of the Eurasian landmass, an effort by the Korean Investment Corp. to buy a 19 percent stake in a U.S. baseball team was canceled in the wake of (and perhaps as a consequence of) criticism from an opposition member of parliament. Yes, as Teitelbaum observes, the CEO of KIC denies that such criticism is what killed the Dodgers deal, but that is the sort of face saving thing CEOs often say.

Meanwhile , in Singapore the head of the Singapore Democratic Party is demanding transparency from the two important SWFs associated with that country: GIC and Temasek. They should “open their books” say Chee Soon Juan. Chee disagrees both with specific decisions of theirs (each invested in large US based banks as those banks entered crisis in 2008, each was in some measure rescued by the US Treasury’s TARP program) and with their reporting. He says that Temaselks’ claims about its returns are in particular inconsistent with its claims about its returns, and he wants transparency so he can figure out the discrepancy.

After seemingly pooh-poohing the oil leg of this tripod early in his article, Teitelbaum comes back to it later. Yes, oil is a big deal. Norway’s aforementioned GFPG was valued at $893.2 billion in 2014 according to Sovereign Wealth Center estimates, but that number is down to $877.4 billion this year. The International Energy Agency calls Norway “the third-largest exporter of energy in the world,” and the GFPG is bound up with the value of those exports. Indeed, that’s why the GFPG exists, to see to it that the oil boon does not cease to be of benefit to Norway when the oil fields there run dry.

Climate Change

But … Norway is also a country where the desire to roll back climate change is an integral part of the political culture. One activist website, the “REDD Monitor,” says that Norway is feeling a collective sense of guilt from the receipt of so much oil money, and its own reforestation and climate initiatives are efforts to assuage that sense of guilt.

Teitelbaum’s point in referencing Norway, then, may be that the first source of pressure (the decline in receipts from oil generally) is less of a problem even there than is the third (the politicization of SWF governance) in situations where the two are very much and very obviously intertwined.

A subsidiary point, the mere fact that the fund has a lower valuation this year than it did last does not by itself constitute a crisis. Teitelbaum quotes Andrew Bauer, senior economic analyst at the Natural Resource Governance Institute, saying that for SWFs, “size for the sake of size makes no sense.”

Anyway: what does all this mean for alpha seekers? To answer that: understand that SWFs are not alpha seekers. They are at best beta players. At worst, they are inefficiently run pension funds. For reasons of unwieldy size and time horizon alike, they aren’t in a position to crowd hedge funds out of the latter’s distinctive plays. Instead, they may create some such plays by their own whale-like presence. SWFs aren’t card counters at the casino. They may in some circumstances become the casino, vulnerable to good card counters.