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Posts Tagged ‘SWFs’

How we fund our SWFs

In CPF, GIC, S'pore Inc, Temasek on 02/11/2010 at 5:42 am

This piece is an attempt* to answer,”If Singaporeans are not “hard-driving and hard-striving”, where did GIC and Temasek get so much money to lose?”: a posting on a Temasek Review article in late 2009.

The answer parroted mindlessly by the government is that government budget surpluses mean that GIC and Temasek get money to invest with.

A more detailed explanation has to start with how the surpluses arise.

As about 43% of the working population  don’t pay income tax, and VAT and other taxes are relatively low: one way the surpluses are generated is by a government being thrifty (government’s view) or mean (view of many netizens).

Economists in the private sector, and the Reform Party (the sec-gen was once an economist and he has a first-class degree from Cambridge) have argued that rather than accumulate large surpluses that are then invested abroad, the government should spend more building up Singapore’s human capital. By spending more on things like education, healthcare and consumer protection, the returns generated will be better than the returns on overseas investments.

This is an argument that has excellent academic credentials. China is often asked by eminent economists ,”Why do you export so much when you, in return, use the surplus lend to the Americans so that they can buy more from you?” The economists advise that China should invest more locally.

The government’s view is that Singapore needs the reserves as an emergency fund should things go badly wrong. The late Dr Goh Keng Swee talked of spending the reserves in a recession (as has happened recently). Dr Goh and others could also have quoted the example of Kuwait. When Kuwait was invaded by Iraq, the reserves were used to help pay for the war. And afterwards for the reconstruction of the country. They could also have cited Iceland and Dubai as countries that got into trouble because they ran out of $, when they could not borrow any more.

The second reason why surpluses occur is that our CPF monies are invested in special government bonds. The $ from the bonds flow into the government’s Consolidated Fund together with revenues from taxes etc. All government expenses are paid out from this fund. If there is a surplus (as there usually  because the government is thrifty or mean depending on who is doing the talking) part of that surplus can go to GIC and Temasek. The government argues that because all the monies in the fund  is fungible (cannot be separated), one is wrong to argue that CPF monies are invested abroad.

Technically and legally the government is correct, but so what is the retort? The financial effect (though not the legal consequences) is the same as if our CPF monies are directly invested abroad.

And these special bonds are the reason why S’pore is up there on a  list that the local media does not ever publicise. S’pore has the 8th highest public debt to GDP ration (113.10%) in the world. Greece is 7th with 113.40. Other countries on the list above us are Zimbabwe  (champion), Japan (second), Lebanon and Italy. Iceland is 9th (106.7) while Ireland is at 36 (57.7).

(Aside, could this high debt to GDP ratio be the reason why the govmin wants to force-feed GDP growth through immigration? I may explore this issue in future and I hope RP will explore the issue as something the electorate should be educated upon.)

Singapore is unique among the countries with the largest sovereign wealth funds. The other SWFs are effectively funded from oil revenues. In the case of Singapore, it could be reasonably argued, by government critics, that the funding results from the “hard-driving and hard-striving” Singaporeans who are forced to save and lend the money to the government; and from less than optimal government spending.

So the quote at the beginning of this piece has elements of the truth. And worse: one could reasonably argue that the government makes something for itself from “hard-driving and hard-striving” S’poreans.  One noted local economist has said that the government is effectively pocketing the difference between the returns it gets from investing abroad and the returns it pays on our CPF accounts: a carry trade arbitrage. Borrow low and invest for higher returns.

*What with an election coming, I tot I should revise (and repost) a piece I did in December last year. The revision has been pretty extensive.

Our SWFs: Learn from the Arabs?

In GIC, Temasek on 12/05/2010 at 5:39 am

Ahmad al-Sayed, chief executive of Qatar Holding, told the Financial Times that the acquisition of Harrods was part of a strategy to acquire “prestigious top-performing businesses and to buy them at the right point in the cycle”.

Qatar Holding is the primary vehicle for Qater’s strategic and direct investments. It is an arm of Qatar Investment Authority (QIA), which was founded in 2005 to strengthen its economy by diversifying into new asset classes.

Temasek’s investment strategy centres around four themes:

• Transforming Economies

- We invest in industry sectors that correlate with the economic transformation of the country

• Growing Middle Income Populations

- We find opportunities in companies and industries whose growth is fuelled by the increasing purchasing power of middle income populations

• Deepening Comparative Advantages

- We tap the potential of competitively-positioned companies

• Emerging Champions

- We identify companies proving to be best-in-class, be it regionally or globally.

GIC simply says, The group strives to achieve good long-term returns on assets under our management, to preserve and enhance Singapore’s reserves.

Note nothing about trying to time investments. Maybe thaz why they messed up big-time on Merrill Lynch, Citi and UBS. Even MM admitted that much saying they went into too early into financials.

Now Qatar’s  track record is not that great either: but at least it sets out a benchmark on which it can be judged.And it shows it is aware of the importance of timing.

BTW a lot of Buffett’s skill is in knowing when to be greedy.

GIC’s strategy is

SWFs’ big equities bets underperform

In GIC, Investments, Temasek, Uncategorized on 01/05/2010 at 6:16 am

Companies do badly after foreign sovereign wealth funds buy their shares, according to”Sovereign Wealth Fund Investment Patterns and Performance” by Bernardo Bortolotti, Veljko Fotak and William Megginson, reports the FT.

When an SWF invests, the target company’s share price often jumps in the days surrounding the investment, the research found, but over the following year or two, the share price significantly underperforms its peer group.

SWFs usually take significant stakes in companies – the median stake, according to the research, is 8%, the average 14% – and frequently buy the shares directly from the companies rather than on the open market. After two years, the average investment had lagged its peers by 10%.

“They’re giving cash to the companies and taking a large passive stake. All the literature shows this is a bad idea,” said Prof Megginson. The exception that proves the rule is the Norwegian Government Pension Fund, which makes small scale investments in publicly traded shares.

When its results are stripped out of the data, the negative impact of SWF investment looks worse, with an average underperformance of 13.55%.

The findings support the academics’ “Constrained Foreign Investor Hypothesis”, which predicts that foreign investors, particularly SWFs, will find it difficult to hold directors of companies to account because political considerations make them reluctant to antagonise management.

Political concerns may also deter them from selling shares in companies that are not performing according to expectations, removing another possible feedback mechanism that might improve the management of a company.

The underperformance that follows such passive ownership is a problem for other shareholders as well, said MrPeter Butler, chief executive of Governance for Owners.

“It’s the free-rider problem. SWFs are relying on other shareholders [being engaged owners] and holding directors to account. Either they get something for nothing, or nobody does it and the shareholders suffer,” Mr Butler said.

The new research will likely cause some debate, particularly as it flatly contradicts other studies that showed companies benefiting from SWF investment. Nuno Fernandes, professor of finance at IMD and a Lamfalussy research fellow of the European Central Bank, recently published a paper showing SWF investments led to a significant outperformance by the company. Prof Fernandes reported that further research led him to conclude SWFs were actually very good at monitoring companies where they had invested, as well as opening up new markets for the companies and helping them lower the cost of capital.

So Temasek and GIC be warned.

A Contrarian Trade or Betting against SWFs?

In Energy, GIC, Temasek on 29/12/2009 at 5:43 am

Maybe it is time to buy the banks? Like John Paulson who is long BoA (Remember he correctly predicted the sub-prime credit crisis in 2007. That reaped him a US$3 billion profit.)

In a story from Fortune: “The next wave of sovereign wealth fund investments is likely to look very different from the flurry that occurred before the crisis. For one, the funds have drastically cut back on banking assets. Just 16% of the deals they made this year involved the financial sector, down from 48% in 2008, according to Barclays data. (Remember Temasek’s and GIC’s investments in Merrill Lynch (BoA), Barclays and UBS; and Temasek’s sales of BoA and Barclays.  GIC  only made wagga($) on Citi and it could get diluted there on its remaining holdings.)

And short or sell natural resources.

“Meanwhile, including China Development Bank, which received a capital boost from China Investment Corp., more than 50% of sovereign wealth funds’ investments were in the natural resources sector, up from a mere 8% the year before. Huey Evans points to the Chinese government’s investments in Rosneft and Petrobras (PZE), oil companies that agreed to send the country fuel in exchange for loans.”

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