To institutional funds managers, sovereign wealth funds are huge pools of assets that are domiciled across the globe and have few things in common, making business development a big challenge. SIMON MUMME reports.
Sovereign wealth funds (SWFs) are only similar in two ways: “they are sovereign, and they are large sums of money,” says the regional head of a global funds manager, who like many potential service providers to SWFs, requests anonymity. An attempt to build common products for, say, the SWFs of Norway, Australia, Saudi Arabia and China would be a naïve endeavour, and to regard them as similar entities would be myopic, as their investment styles and strategies, governance structures and transparency levels vary.
“They have different motivations and masters,” the CEO says. Service providers to these funds find that an axiom of customer service – know your client – bears new meaning when dealing with these large patrons.
Although some newer, smaller SWFs can be passive, product-taking clients, the scale and internal resources of the more advanced funds enables them to seek partnerships with manufacturers and service providers and not settle for ready-to-go options. “The whole industry is bifurcating between those who seek products and those who seek services,” an industry executive says – some are “participants” while others are “product-buyers”. On its website, the $875 billion Abu Dhabi Investment Authority (ADIA), rumoured to be the world’s largest SWF, describes itself as a “trusted and responsible investment partner”.
State Street and JPMorgan are two global firms that have established separate divisions to engage SWFs and other sovereign reservoirs of money, while other global managers, such as Vanguard Investments and Principal Global Investors, see them as big institutional funds.
In 2000, State Street set up the Official Institutions Group, an eight-person team headquartered in London that only deals with ‘official’ funds: central banks, sovereign pension funds and SWFs. These clients account for about $250 billion of the firm’s $2 trillion under management. Hon Cheung, who runs the group’s office in the Asia-Pacific region, says the group is “a multi-disciplined team of people” which approaches sovereign funds primarily from the perspective of a senior relationship manager. However not all asset managers regard these specialised groups as necessary: an executive from a rival firm calls them “gimmicky”.
But entities such as State Street’s Official Institutions Group may help firms develop the partnerships that big SWFs are looking for. While that group’s clients can access the array of investment products and services proffered by State Street, they also learn something of their competitors’ strategies from the group, and receive training in the many facets of investment management, such as portfolio management, risk analysis, custody and administration, Cheung says. “They like to understand what their peers are doing and cross-check this with the private sector.” These clients prefer long-term relationships over singular deals. “These are large pools of assets, so you don’t want to be short-term.”
Like the more sophisticated superannuation funds, many SWFs are engaging asset managers and investment banks for particular investments as partners, rather than clients. “Merrill Lynch is trying to go down this route, Look at who they’ve just hired as a consultant,” the regional CEO says. Referring to the investment bank’s appointment of Steve Gibbs, formerly the chief executive officer of the $18 billion Australian Reward Investment Alliance, as a consultant to liaise with super funds in the investment bank’s quest to distribute synthetic and alternative products.
Likewise when SWFs (and big super funds, too) move to buy a stake in a company, it’s likely that they will call on investment banks, rather than funds managers, to assist with these types of transactions. The funds are also attracting hedge fund, private equity and other alternatives managers since the provision of liquidity is not a major objective. This has prompted comparisons with the endowment funds run by prestigious US universities, such as Yale and Harvard, which secured capacity with alternatives managers long before pension funds began looking at this side of the market.
Cheung acknowledges that SWFs can behave like the endowments, but says “the truth is that SWFs, like any large pool of assets, have a large component [of their funds] in core-index products, to get low-cost, efficient market exposure”.
To partner with these clients, some of which have the capacity to invest across the world, service providers need reliable global reach. “You might have the Norwegian SWF, and the servicing is contracted in the regional office, but the service is provided globally,” the regional CEO says.
Investment consultants, meanwhile, are being asked to focus on particular asset classes in SWF portfolios. Australia’s Future Fund, which employs Watson Wyatt as a more or less comprehensive asset consultant, is one exception. SWFs are a diverse group, and their demands stem from the sophistication of their investment strategies. New SWFs in developing economies, such as the $US2.9 billion Petroleum Fund of Timor-Leste, are not usually run by veterans of Wall Street or London. The Petroleum Fund, which recently appointed the Sydney office of JPMorgan Worldwide Security Services as its global custodian, is sourcing skills training from the firm.
David Brown, a relationship manager with JPMorgan who helped drive the Timor deal, says the appointment of a global custodian was the “first step in extending their investment strategy – they can appoint external managers from now”.
SWFs investment style can be either strategically or financially focused. Strategic SWFs make concentrated investments in public and private markets, are not afraid to pursue activist strategies, and are usually non-transparent, whereas the financially-focused funds make broad, diversified investments, mainly in public markets, are quite transparent and are passive shareholders. Strategic SWFs have the potential to cause controversy, since the impacts of their investments can be significant and little is know of their motives, other than “to promote economic growth and make strategic investments” or “maximise long-term shareholder value as an active investor and shareholder,” Hon
Cheung writes in a State Street Global Advisors research paper. Through its website, ADIA, a strategic SWF, states that its focus is “long-term value creation”. Such an aim could be seen as the third common characteristic of the large, sovereign sums of money.