Five years ago, most sovereign wealth funds acted largely as index investors, taking stakes in major indices to get equity market exposure. That picture is now changing
At a glance
Things are changing at sovereign wealth funds (SWFs). As assets under management (AUM) have grown to more than $7 tn, these seemingly hard-to-reach funds are taking more of their asset management in-house, as well as building out their internal teams. But what’s driving this trend? And how can IROs get their story across to the people in charge of such massive cash piles?
Taking the long view
SWFs may vary in their openness, investment strategies and targets, but whether it’s an oil-based Middle Eastern fund, a non-commodity Chinese one or an ESG-focused giant like Norges Bank Investment Management (manager of Norway’s $882 bn oil fund), SWFs have one trait in common: they are typically long-term investors. Historically, they have also taken a largely passive approach to both stock selection and engagement with companies.
That said, investment strategies at some of these funds – many of which manage in excess of $50 bn – began changing somewhat after the 2008 crash and the accompanying fall in asset valuations, says Michael Maduell, president of the US-based Sovereign Wealth Fund Institute. ‘Since the global financial crisis, SWFs have become more apt to take positions and actually vote on issues rather than simply be passive shareholders,’ he explains.
SWF asset growth picked up again after early 2009, but not even the biggest funds are immune to macroeconomic challenges. In a June 2015 report, UK lobby group TheCityUK says it expects SWF assets to increase by 4 percent in 2015, well below the 12 percent average annual growth of the previous five years. And with $4.3 tn of the total $7.4 tn in SWF assets coming from oil and gas, the SWF Institute says oil prices – which were below $50 a barrel at time of writing – could have a significant impact on growth.
‘The first three months of 2015 saw only a marginal increase in SWFs’ assets in the headwind of falling oil prices,’ confirm the authors of TheCityUK report. ‘If oil prices remain low for an extended period, some oil-producing countries may divert money from SWFs to stabilize their domestic economies and finance budget shortfalls. Slower GDP growth in China is also likely to constrain growth in assets during the year.’
While change is slow at such massive funds, there have been movements. In 2013, for example, Norges – the world’s largest SWF, managing more than 95 percent of its assets in-house – added a head of corporate access in the form of Hugo Sanders, former head of the EMEA corporate access team at Barclays Capital. And in 2012 Abu Dhabi Investment Authority (ADIA) cut the percentage of its assets managed by external managers from 80 percent to 75 percent. Its 2014 annual review, published in June, reveals that this has dropped a further 10 percentage points to 65 percent. For a fund of its size – $773 bn – that’s a huge amount of asset value being brought in-house over just three years.
ADIA also dropped the percentage of its indexed assets by 5 percentage points to 55 percent in 2012, although that figure has remained the same since.
Overall, ‘SWFs have maintained their percentages on active versus passive management over the past few years,’ says Maduell. ‘With the advent of smart beta or factor-based products and oil volatility, however, that ratio will most likely shift.’
Patrick Hughes, director of advisory services at NASDAQ, also points out that ‘[China’s] State Administration of Foreign Exchange (SAFE) Investment Company is an interesting one. It doesn’t disclose, it’s a bit secretive in that sense, but increasingly in our view it’s an active manager. It has hired a lot of ex-fund managers from traditional asset managers and the days of SAFE being an index investor are long gone.’
SAFE, which is responsible for managing China’s foreign exchange reserves, has $547 bn under management. Most meetings with the fund take place in China or Hong Kong, although it also does reverse roadshows to visit some of its foreign holdings each year, Hughes adds.
Meeting big money
Research by IR Magazine highlights differences in gaining access to some of the more open funds. Norges, for example has a rating of 10 on the Linaburg-Maduell Transparency Index, which was developed by the SWF Institute. Almost half (48 percent) of respondents to the IR Magazine Global IR Survey met with Norges in 2014. SAFE, on the other hand, has a transparency rating of 4. Despite its estimated $30 bn in non-domestic equities under management (EUM), only 15 percent of IROs say they met with the fund last year.
SAFE has started to make itself more available, however, writes Stu Taylor, partner and head of capital markets research at UK IR consultancy Fairvue Partners, in a report published in June. ‘Both the Kuwait Investment Authority and Government of Singapore Investment Corporation (GIC) have been proactively meeting with and gaining an empirical understanding of individual equity propositions for a number of years,’ he adds.
Interestingly, a third of IROs say they met with no SWFs in 2014. Maduell says they’re missing a trick: ‘IROs have their head in the sand when it comes to understanding SWFs. They pay too much attention to the usual suspects. Instead, they need to get educated on this investor class because wealth funds can be beneficial shareholders for a company.’
That’s apparently what 28 percent of IROs plan to do, with that number saying they intend to boost their SWF targeting this year. So where should they begin? The first step is to work out which funds you want to target. Using its own data, alongside figures from the SWF Institute and FactSet Research Systems, Fairvue compiled a list of just 14 out of a total 78 SWFs that manage any non-domestic public equity holdings internally (see below). Of those, Norges has $548 bn in non-domestic EUM, according to Fairvue – more than $500 bn more than the next-largest non-domestic EUM figure of $40 bn at GIC.
Two other funds – Korea Investment Corporation and China Investment Corporation – invest this money via indexes, while four more make strategic investments. So two things are clear from the data, says Taylor. The first is that ‘the size of an SWF is not [indicative] of its international investment capacity; six of the 14 SWFs that manage foreign holdings in-house hold less than $100 bn each in current assets.’ The second is that ‘in reality, no more than half a dozen SWFs would be suitable for each issuer to engage with.’ He adds that ‘understanding what triggers an investment, where there are constraints and, most importantly, who is behind the decision to buy are all critical.’
Hughes agrees. ‘You don’t want to show up and find out that most of the money is managed by sub-advisers,’ he says.
In addition to external asset managers, many of the larger funds operate offices around the world. The non-commodity $344 bn GIC is an example of an SWF that can be confusing, Hughes says. Having sector analysts based across London, New York and Singapore means it can be hard to work out where, as well as who, you should be meeting. ‘It’s quite specific per SWF, which really makes it a challenge for IROs,’ says Hughes.
Getting in touch
Gunhild Grieve, London-based IR manager for RWE, says Norges is on the register, ADIA has been in the past and GIC, which she calls a ‘very active fund manager’, dips in and out for ‘sector or company-specific reasons’. Because around a quarter of the German energy firm’s shareholders are municipal holders, however, RWE doesn’t need to actively target SWFs. ‘If they appear on our share register we try to maintain a good dialogue and we continue to see SWFs that were previously on the register,’ Grieve explains. ‘But it’s not as if we go to the Middle East to target them, for example.’
For Grieve, the openness of Norges means it can be compared ‘with any pension fund or other asset manager – it has a very sophisticated asset management arm and if you do your shareholder ID or want to find out how much it owns, you can just get in touch with its compliance office and it will provide you with the relevant data.’
One area Norges has been very open about is its intention to divest from companies that rely on coal for more than 30 percent of their business, a decision that could hit utility firms like RWE. Grieve says the company has been in active discussions with Norges but the situation is not yet completely clear. ‘The last time we spoke it wasn’t yet fully certain how [the divestment] would be applied and whether other factors such as a strategy of stepping out of coal or bringing down exposure to it might influence it,’ she explains.
‘The SWF I can talk least about is China; it’s very hard to find someone who can speak to you about its investment strategies. You have to go to China if you want to see the fund, and even then it’s not always certain you’ll be able to meet somebody.’
Even with an SWF as transparent as Norges, however, another IRO says trying to reach the right person can be difficult. A fund of that size can’t meet with all its holdings: Norges invests in more than 9,000 firms across 75 countries. But as it is a big holder in many firms – and one that votes its proxies – this IRO, who wishes to remain anonymous, wanted to connect ‘from a governance perspective’ to make sure the fund had no questions surrounding the proxy, for example. ‘Trying to reach the person who’s responsible for equities in my sector might seem something you could do fairly easily,’ he says. ‘But it took me three years.’ Now that he has established contact, it’s about maintaining the relationship: ‘You have to engage with SWFs – you can’t expect them to reach out to you.’
One IR professional with first-hand experience of being targeted by and targeting SWFs is Mélanie Hennessey, vice president of corporate communications at NovaGold. When targeting these funds, she explains that it very much comes down to doing your own research ahead of time, looking at a fund’s investments and strategy and getting in touch with the right person – which initially is challenging.
‘It’s cold-calling more often than not and then providing a solid investment argument as to why it should be meeting with you,’ Hennessey says. But even with a strong story, you still need to stand out, she adds. ‘It might take 20 calls for one meeting or you might call 20 funds and get turned down by each one. But it’s the one that works that becomes a partner – which makes it worth all the effort.’
SWFs as partners
Talking about SWFs as potential partners is something Hennessey does a lot. When an SWF started doing due diligence on potentially investing in NovaGold, the intensive process of providing data and having meetings spanned a couple of years. But SWFs look at their investments for the long term.
‘In our case the SWF was very, very thorough,’ notes Hennessey. And after all the hard work, NovaGold has gained not just an investor but ‘a very committed partner’. The fruits of your labor can be hard to measure, though: ‘You won’t necessarily see how much of your entity it owns but if it has spent that much time doing due diligence it’s either going to benefit you today or in the future,’ she points out.
This idea of the SWF as a partner rather than just an equity investor is something Hennessey expects to see increase. ‘I think most sovereigns want to get involved,’ she says. ‘And that’s not limited to just simple investments. In the mining industry, for example, it was previously more common for companies to own, where possible, 100 percent of the asset. Today, what we’re starting to see is larger entities, especially, wanting to share that risk.’
Building trust with SWFs is also important, she adds. ‘They are very similar to the sort of investment partners you would have in Asia, where you wouldn’t expect to get any sort of gratification after the first meeting,’ she notes. ‘You’re really working on building trust but once you have them as investors, they really are investors for a long time.’
Because of this, while NASDAQ advises IROs to use a broker – especially to find out where the decision-making power lies – Hennessey says companies should reach out to SWFs themselves. ‘SWFs are looking beyond investment opportunities; they’re looking at how they can get involved, how they can get the best return – and that might not necessarily be through the ownership of shares,’ she explains. ‘It might be through the ownership of part of a project or by funding part of the project. They look outside the box.’
Source: Demystifying the sovereign wealth fund universe, Fairvue Partners. Click for a larger image
Some of the largest SWFs have been branching out with offices across the world
Click for a larger image
‘SWFs are choosing to increase their international presence in tandem with the gradual development of their in-house asset-management capability,’ says Anjalika Bardalai, deputy chief economist at UK lobby group TheCityUK. ‘International offices allow SWFs to be closer to the markets in which they operate, and to expand the range of their investment opportunities.’ In fact, nine of the largest 20 SWFs have offices in London, while seven can be found in New York, according to TheCityUK. Some offices are direct branches of the funds, while others, such as the Luxembourg and Grand Cayman outposts of Abu Dhabi Investment Authority, are operated by sub-advisers.
This article appeared in the fall 2015 print issue of IR Magazine