Lou Jiwei on the Rule of Law

From the South China Morning Post:

Chinese sovereign wealth fund chief Lou Jiwei yesterday urged the government to show greater respect for the law.

“When we talk about governing the nation based on law, government departments must first govern themselves based on law,” Lou, chairman of the China Investment Corp, told a forum held by the China Centre for International Economic Exchanges.

Lou’s comments reflect growing calls from Chinese liberals to push forward with legal reform, which many believe is critical to improving equality, reducing corruption, boosting government credibility and further freeing markets during the next decade.

As I have argued, SWFs and their sponsor countries must abide by the rule of law if they want to have easier access to foreign markets and, relatedly, want to keep their transaction costs low.  Lou, focused on the returns to CIC (and, I’m sure, thinking more broadly about the impact of the rule of law on Chinese society) is clearly focused on this reality.


(Photo: Bloomberg)

"2 and 20" Moving to "1.5 and 20"?

So reports aiCIO, citing a Mercer study:

A greater willingness of managers of hedge funds, direct private equity, and infrastructure funds to negotiate fees has made alternatives the only asset class to have experienced a material drop in asset management fees, according to Mercer.

In alternatives, what was once a “2 and 20” industry standard continues to move toward “1.5 and 20,” a trend fueled by supply and demand dynamics leading managers to be more flexible in negotiating fees, Mercer said.

Geographically, the firm discovered that–taking all asset classes into consideration in US dollar terms–Canada remains the most inexpensive country/region in which to invest, with average median fees of around 0.3%. The UK and Europe are also relatively low priced, with average median fees of around 0.4% and 0.5% respectively. Emerging markets remain the most expensive country/region at 0.89% on average, with Asia averaging 0.75%, a decrease of 0.08% since 2010.

“Given the plentiful supply of good quality active management, the level and structure of active fees has been remarkably resilient to a slowdown in demand,” said Divyesh Hindocha, global director of consulting for Mercer’s Investments business. “As we move from a defined benefit based pensions system to a defined contribution based pension system, which is much more cost conscious, our hope and expectation is that we see some innovation in this area, as otherwise the demand for active management may well fall off a cliff.”

The firm found that around a third of managers have increased their fees. Most small cap equity strategies have increased fees except in the US where such fees have tended to decrease.

Mercer’s 2012 Global Asset Manager Fee Survey, the fifth such biennial survey, analyzes data on more than 25,000 asset management products from over 5,000 investment management firms.

For background reading, my friend Vic Fleischer has the definitive article on the 2 and 20 structure here.

2012 Comeback Fund of the Year: CIC

CNBC reports:

China Investment Corporation (CIC), the world’s biggest sovereign wealth investor said 2012 was a much better year for the $482-billion fund, with returns of over 10 percent.

“2012 was a much easier year than 2011 and the returns are much better,” Chairman and Chief Executive of CIC, Lou Jiwei told CNBC on Monday. “[T]he final numbers have not come out…but we are confident our returns will be over 10 percent.”

Double digit returns would be a big turnaround for the fund, which suffered its first ever decline in profits in 2011. Net profit declined 6.1 percent in 2011 to $48.4 billion compared to 2010.

Lou Jiwei also provided a familiar reminder to US regulators:

The chief executive said that the U.K and Canada were the most welcoming of Chinese investment, “but the U.S. is not the same.”

Europe, which had once “resisted” foreign investment, had changed its tune as its circumstances had worsened, Jiwei told CNBC. Indeed, Europe has assiduously courted Chinese investment of late, with the French finance minister being the latest emissary to Beijing to drum up Chinese investments.


Illinois' Crisis of Leadership

The New York Times reports that Illinois has tried, but failed, to fix its broken pension system:

If ever there was a moment when Illinois’s drastically underfinanced pension systems had a real shot at being repaired, some state leaders thought it would be this week.

Nearly everyone in this Democrat-controlled Capitol agreed that the circumstances had reached the point of crisis. More than 30 departing lawmakers were preparing to give up their seats on Wednesday, so worries about political futures could, for now, be tossed aside.
And several proposals, including one requiring higher contributions from state workers and teachers and limiting cost-of-living increases, were on the table.

But as the lame-duck legislative session drew to a close on Tuesday evening, there was no deal. Lawmakers began talking optimistically about how they would keep searching for a fix to the nation’s most underfinanced state public pension system during a new session in the months ahead. And the shortfall in the state’s pension systems, now about $96 billion, will keep right on mounting at a rate, according to an estimate by Gov. Pat Quinn, of $17 million a day.

For months, Mr. Quinn and others had held up this weeklong stretch — before new lawmakers are sworn in — as a make-or-break moment. “We have to be bold,” Mr. Quinn, a Democrat, said Tuesday morning. He urged lawmakers not to allow the state’s economy “to be held hostage by political timidity” and called a pension overhaul the “challenge of our time.”

The problem is not merely political, however–there is a serious legal issue lurking in the background, serious enough to potentially invalidate at least part of any grand bargain legislators might strike.   The Illinois Constitution contains a provision that was designed to prevent the very thing Illinois legislators are trying to accomplish, at least with respect to existing pension arrangements:


Membership in any pension or retirement system of the State, any unit of local  government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

What this seems to me to require is a constitutional amendment, approved by the citizens of the State of Illinois.  Otherwise, suits are sure to follow.  I have no idea whether the citizens of Illinois would approve such an amendment, but I suspect it would be a challenge.  Unlike the amendment in Alabama, which allowed the state to tap into its permanent fund–a pot of money that does not and will not, for the foreseeable future, have a significant impact on Alabama citizens’ lives–pension payouts have direct, forseeable effects on many thousands (maybe millions) of people in Illinois.