SWS Latest Developments and Future Challenges

Sovereign Wealth Funds Latest Developments and Future Challenges Presented by: London Financial Regulation Seminars (LFRS) Taxonomy & Heterogeneity Asset Owners Central Banks State Owned Investors Stabilization or Rainy-Day Funds Sovereign Savings Wealth Funds EndowmentFunds Sovereign Investors Official Institutions Strategic or Development Funds Public Pension Funds Plans Funds Central Bank MAS PBOC/SAFE DoF SAMA RvQ BOE US$ 15.5 trillion or type Foreign Reserve MAS Accounts Sub-accounts of Pula Central Banks Fund Independent SOFAZ Stabilization Buffers Future Generation ADIA Funds (O&G) FX reserves- GIC sourced Funds National Pension NZ Reserve Funds Super Holdings or Temasek Umbrella Funds Catalysts or FDI INA Funds Defined Benefit CalPERS (LDI) Defined CPFB Contribution CDPQ SWF-Stab / Sav (Liq) SWF-Strategic (Hid) GIC Temasek SAFE IC, CIC Central Huijin ADIA Mubadala, ADQ PIF - Liquids PIF - GigaProjects QGF CDPQ Infra BBB-BBI BBBBPC, FF US$ 11.2 trillion Pensions CPFB NSSF ADPF GOSI QPP 8 major LGPS pools US$ 23.0 trillion Asset Allocation Trends  Sovereign Wealth Funds have increased their allocation to alternative assets significantly during the past 15 years  Several funds have started adopting Total Portfolio Management beyond traditional definition of asset classes Different SWFs, Different Returns Comparability of performance across SWFs is challenging: 1. Different missions and asset allocations 2. Different cut-off dates 3. Different currencies 4. Different metrics (TSR, ROE, IR) Even if we managed to homogenize them all, the winner would not necessarily be the one with highest return. Other goals include: 1. Economic diversification 2. Creation of employment 3. Attraction of foreign capital 4. Reduction of carbon footprint Governance Following Best Practices Is Not Only About Being Transparent - Most important aspect is Legitimacy, i.e., isolation of SWF from political decision and corruption - SWFs usually pursue economic and financial goals, very rarely are they political animals - The world's most transparent fund, Norway's NBIM, is not necessarily the best managed (e.g., PE) - Transparency is however sometimes necessary (e.g., UAE's Mubadala, Saudi's PIF raising capital) Good Governance Is In The Eye Of The Beholder - IFSWF charges US$ 30K p.a. to SWFs that would like to claim abidance by the Santiago Principles Some of the most transparent funds, Norway's NBIM, Chile's ESSF-PRF, have now left the Forum - Some of the world's most opaque funds, including Qatar's QIA and Kuwait's KIA, continue being members but have not published an annual report or made public their AUM - The principles continue to be non-enforceable, non-quantitative and conflicted-ie., obsolete Covid-19 Highlighted Resilience Issues (Only When The Tide Goes Out...) - First responders, i.e., stabilization and savings funds provided economies with US$ 211 billion. - Some Latin American countries wiped out their SWFs entirely. GIC was withdrawn US$ 40.1 billion - Second responders, i.e., strategic funds, helped by bailing out state companies including Singapore Airlines by Temasek (US$ 4.7 bn), Emirates by ICD, and Qatar Airways by QIA (US$ 2 bn each) - Dr. Satragno: "While some SWFs have been depleted by crises, others-like Singapore's GIC and Temasek- have become institutional bulwarks of resilience and stability for their home country in turbulent times" Future Challenges 1. Dr. Satragno: "The instrumental role of SWFs can only be sustained with an appropriate level of regulation that balances strong governance and clear rules on the one hand and the avoidance of protectionism on the other." 2. Easier said than done, unfortunately: a. Lack of global, standard regulation across countries (CFIUS, UK NSIA, EC merger control) b. Acceptance of recipient countries highly dependent on economic cycles c. Tax issues including Sovereign Immunity (s892) can be deal breakers d. Geopolitics and war games playing an increasingly important role - Russia, China e. Always ways to avoid scrutiny, e.g., CIC-Goldman Sachs f. Key will be to find an updated and relevant set of rules that would prevent political mismanagement and be somehow enforceable - US-led or multilateral-led effort? 3. Social debate  Singapore model is extraordinary - but very difficult to replicate from scratch   GDP Growth 1961-2022: Singapore 7.0% p.a. vs World 3.5% p.a. How much is enough? Should SWFs set up more aggressive withdrawal rules?  Singapore's NIRC system allows government to lower VAT but not extinguish it  Norway's NBIM allows to withdraw the expected real return of the fund, i.e., 3%  Alaska's PFC distributes dividends every year (US$ 1-3K) to its 700K residents