How to ensure good returns in the current environment

The International Forum of Sovereign Wealth Funds (IFSWF) held their Eighth Annual Conference in Auckland, New Zealand, from 8-11 of November. One of the issues the international conference addressed is how SWFs could ensure high enough returns in a low growth, low-interest rate environment.

According to Bob Prince, co-chief investment officer at Bridgewater Associates, an investment manager company, if SWFs are looking at the most efficient way to diversify an asset portfolio, they should focus on growth, inflation, the discount rate (the future return on cash) and risk premiums, and balance these factors, depending on how they impact on your portfolio.

Bridgewater Associates, founded in 1975, manages over USD $150 billion for approximately 350 of the largest and most sophisticated global institutional clients including public and corporate pension funds, university endowments, charitable foundations, supranational agencies, sovereign wealth funds, and central banks.

Massimiliano Castelli, head of strategy, Global Sovereign markets, UBS Asset Management, argued that in the future, SWFs could, theoretically, increase their risk to achieve higher returns but said that this will depend on the maximum loss institutions are willing to take.  He noted that data suggests that illiquid assets will continue to offer superior returns to liquid assets and those SWFs without current liquidity needs are uniquely positioned to take advantage of this.

He also suggested that SWFs establish a tactical/cyclical investment framework. “An ongoing low-return environment or more challenging investment regimes than in the past, such as stagflation, will require much more active investment styles,” he said.

Moreover, a SWF should implement alternative portfolio construction techniques, he said. “A move towards a hedge-fund style investment framework relying on extensive use of derivatives, leverage, sophisticated risk models and, more generally, more sophisticated investment engineering” is one alternative, he suggested.

However, this would require a high level of professionalism and will depend on whether political sponsors support such an investment style, he added.

About 250 people from around the world attended the SWF annual conference in Auckland, including 30 members, whose funds together account for 80% of the assets under management by SWFs worldwide, or USD $5.5 trillion of assets. Members adhere to the “Santiago Principles” - a voluntary code that highlights that stability as well as economic and financial purposes are the defining features of sovereign capital. The Principles provide 24 items of practical guidance on the institutional governance and risk management frameworks necessary for sound long-term investment practice.

Members include the NZ Superannuation Fund, the Australia Future Fund, the State Oil Fund of the Republic of Azerbijan, The Pula Fund of Botswana, China Investment Corporation, the Korea Investment Corporation, the Kuwait Investment Authority, Morocco’s Ithmar Capital, and the Palestine Investment Fund.

  Massimiliano Castelli Risk Reward

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Tuesday, 28 June 2022