SovereigNET - Fletcher Network for Sovereign Wealth and Global Capital

Letter from Patrick Schena, Co-Head of SWFI

Summer, 2012

Dear Readers,

schenaWelcome to our Summer 2012 edition of the Sovereign Wealth Fund Bulletin.  The unifying theme of this Bulletin is SWF capacity building.  Specifically we consider various dimensions of the process by which sovereign and other large institutional investors develop and sustain their inherent capacity to build world-class investment organizations. To this end, the contributions in this edition are truly rich and idea- and experience-filled, thanks to the considerable efforts of our contributors.

With this edition we are pleased to welcome several new contributors to SWFI.  Firstly, we are especially delighted to have representation from two sovereign investors enhance the insights shared here. Ewart Williams, the recently retired Chairman of the Central Bank of Trinidad and Tobago and head of the country’s Heritage and Stabilization Fund, shared a career of experiences with Eliot Kalter and me in a recent phone conversation. In addition, Jagdeep Singh Bachher, Deputy Chief Investment Officer of the Alberta Investment Management Co, partnered with Ashby Monk to share their thoughts on building the human capital necessary for successful investment management. Ashby, of course, is very well-known to those who study SWFs and is widely respected for his research and commentary.  We welcome too Ron D’Vari, CEO and Co-Founder of NewOak Capital Advisors. Formerly with Blackrock, Ron has a long and accomplished Wall Street career in finance and risk. Lastly, Sean Mahoney and Eric Yoon, of K&L Gates, join other K&L partners in helping our readers to decipher the complex legal issues that often accompany our study of SWFs.

Whether well-established or nascent, SWFs, like all institutional investors, are challenged to build expert capacity across a variety of key functional areas - investments, risk, and operations among them. This is particularly problematic for investors who operate beyond the bounds of developed markets and global or regional financial centers. In “Attracting Talent to the Frontiers of Finance”, Jagdeep Singh Bachher and Ashby Monk come together to discuss fund strategies for attracting and investing in human assets. Using a creative “Moneyball” analogy and the specific case of AIMCo, they argue for long-term investors to build sustainable value through active human resource policies that best align staffing strategy with an institution’s critical investment and business objectives. Such policies, they argue, must become especially creative when operating on the “frontier”.

Arguably Trindad and Tobago sits on the frontier of global finance. In fact, this very issue was among many that influenced decisions related to the formative development of TT’s Heritage and Stabilization Fund (HSF). As former Central Bank Chairman and HSF head Ewart Williams explains in our interview, the Fund relied heavily on guidance from the World Bank to structure an organizational framework and eventually “out-source” the Fund’s investment functions under mandate to established teams of investment managers. The broader interview is filled with valuable insights that are useful not only to understand TT’s experience, but importantly too as trail markers for newly established funds to consider in building capacity, defining and implementing governance principles, structuring asset allocation policies, and working with other funds and international organizations. We hope you enjoy the interview as much as we enjoyed the conversation with Governor Williams.

In addition to working with my colleague Eliot Kalter on the Williams’ interview, I had the sincere great pleasure of collaborating with him to research issues of institutional asset allocation. Given a current market environment challenged by low returns and high volatility and co-variance, our attention, as others, was drawn to the “endowment model” as a baseline. Our approach, however, was to search beyond models to better understand actual investor behavior. Our overall analysis reveals a certain continuity of investor responses to a persistent low return environment, which we trace to several critical drivers - liability structures, liquidity risk, and investment horizon. We use these to structure a simple framework that we hope will not only inform approaches to SWF allocation strategies, but also help define future research - our own as well - on asset allocation and risk.

Risk is an area of considerable interest and expertise for both Ron D’Vari and David Glancy. As CEO NewOak Capital Advisors, Ron is actively engaged in providing risk advisory and mitigation solutions to global clients.  These days he is thinking and working much on the impacts of a changing regulatory environment on both the investment and operational activities of institutional investors. He shares his thoughts here on several dimensions of proposed regulatory reforms as they relate to risk management by SWFs.  SWFI Affiliate David Glancy’s expertise is in the area of political risk. In his contribution, David turns his attention to building capacity for geopolitical risk analysis and risk mitigation and offers a useful framework for building competencies in geopolitical risk management.

Finally, but certainly not least among our contributions, our K&L Gates colleagues have written an insightful analysis of recent a Federal Reserve Board ruling approving bank holding company status for the China investment Corporation and its subsidiary, Central Huijin Investment. The article is certainly interesting for the legal background it provides on the ruling. However, it is also important in explaining the baseline under which SWFs may operate in pursuing investments in the US banking sector and therefore the competencies they must be prepared to embrace.

In closing, we wish you each a pleasant summer. We hope that you will consider adding some of these thoughtful articles to your summer reading program. As you do, please share your thoughts and comments.  They are both welcome and valued.

With best wishes,

Patrick J. Schena
Adjunct Assistant Professor, International Business Relations
Senior Fellow, Center for Emerging Market Enterprises
Co-Head, Sovereign Wealth fund Initiative