Best practice portfolio investment for Sovereign Wealth Funds Presentation for the Sovereign Wealth

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Best practice portfolio investment for Sovereign
Wealth FundsPresentation for the Sovereign
Wealth Funds in an Evolving Global Financial
System Conference

• 25 September 2008

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Agenda

• What are they?
• Where are they now?
• Where are they heading?
• Concluding remarks

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What are they?
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Long horizon enables higher-risk strategies
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Long horizon provides competitive advantages

• Competitive advantage
• Illiquidity premia
• Mean reversion
• Investment styles
• Corporate governance
• Low transaction cost
• Expertise
• Diversification

• Characteristics
• Positive
• Scale
• Long term horizon
• Positive cash flow
• No explicit liability (in many cases)
• Negative
• Scale
• Subject to political scrutiny

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Where are they now?
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Portfolios reflect investment horizons and purpose
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Sample portfolio allocations show low
alternatives exposures
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Endowment portfolios provide a guide
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Overweight financials

• MSCI All Country Index weighting for
  Financials and Real Estate combined is 20

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Overweight financials - Strategy or opportunism?
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Where are they now?

• Current
• Long liquidity
• Capital preservation focus
• Bias to normal investing
• Time based asset allocation approaches

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SWFs Where are they heading?
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Access broad range of investment strategies
Alpha
Exotic beta
Alternative beta
Core beta

• Illiquid
• Leverage by investor
• Non-replicable
• May not be scalable
• (Nominally) expensive
• Have fat tails
• Opportunity time specific

• Highly liquid
• No leverage by investor
• Replicable
• Scalable
• Cheap
• Normally distributed
• Opportunity not time specific

Source Banz adapted by Mercer
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Governance trends

• Asset allocation managed more dynamically
• Market opportunities
• Objective related triggers
• Governance structures which permits fast decision
  making

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Where are they heading?

• Current
• Long liquidity
• Capital preservation focus
• Bias to normal investing
• Time based asset allocation approaches

• Future
• Short liquidity
• Diversified growth
• Fat tail investing
• Event (market driven) based asset allocation

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Summary

• Current

• Future

Usain Bolt, Jamaica Sprinter
Samuel Kamau Wansiru, Kenya Marathon

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Concluding remarks

• Improve efficiency and stability of financial
  markets
• Capacity to become industry pace-setters
• best practice investment strategies
• best practice investment decision making
  practices
• positive impact on sustainability
• Need to overcome constraints
• External/foreign political
• Internal/domestic governance

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