36% Decrease in SWF Investments in 2012

From The Hindu Business Line:

Sovereign wealth fund (SWF) investments witnessed a 36 per cent dip in 2012 from 2011 levels as managers played it cautious amid global economic uncertainty. SWFs invested just $57.3 billion of fresh capital last year, in comparison with $89.5 billion in 2011, the lowest level since 2006.

As a consequence of the reduced budget, sectors such as healthcare and energy witnessed a reduction in SWF investments in 2012 vis-à-vis 2011. SWF spends on healthcare and utilities fell by more than half and their energy investments dipped by 46.8 per cent.

On the other hand, SWF investment in consumer goods firms shot up by 127.9 per cent and information technology spends by 90.1 per cent in 2012 from year-ago levels.

Data for the 2007-12 period reveals that financial service firms were the top picks for global SWFs during the five-year period, with investments in the sector totalling $140 billion.

Real estate was another SWF focus area, with investments aggregating to $61 billion between 2007 and 2012. Energy and infrastructure attracted $57 billion and $52 billion, respectively, while the industrial sector garnered $34 billion.

Qatar Is Not Your Ordinary SWF

Of course, there may not be such a thing as an ordinary SWF, but Qatar acts boldly in ways that most SWFs do not (and, in my view, most should not).  As noted in this report from the Global post, Qatar’s SWF, QIA, is considering a bid for Marks & Spencer, the reputable UK department chain. 

This is unusual because SWFs typically do not invest in controlling shares; they are not in the business, like private equity firms, of running operating companies.  Instead, they typically passively invest in them. 

But as we saw with the Glencore/Xstrata merger, Qatar is willing to speak up in ways that most SWFs would not.  While this strategy shows Qatar to be a savvy investor, I also believe that other SWFs could probably not do what QIA has.  China’s CIC certainly would not risk doing so, because China is China and Qatar is Qatar.  One is an economic and political rival to the US and other Western powers, and the other is not.  Leaving politics aside, it does not seem to be in CIC’s playbook (as discussed in its annual reports) to operate as a controlling shareholder.  Of course, in the real world I don’t see politics being left aside, just–hopefully–minimized.

The Importance of Cost-Benefit Analysis in Financial Regulation

My colleague Chris Walker and I recently completed and presented a report commissioned by the U.S. Chamber of Commerce’s Center on Capital Markets Competitiveness on cost-benefit analysis in financial regulation.  Although it does not involve SWFs, SOEs or pension funds, it was an interesting and worthwhile project that has important implications for public governance.  The report can be found here, and the links below provide a few of the media descriptions of the report and the event:

Illinois, meet New Jersey. New Jersey, Illinois. I think you both know the SEC . . .

A few years ago the SEC went after New Jersey for omissions and misleading disclosures in its muni offerings.  According to the SEC’s litigation release, the misleading statements and omissions concerned the serious underfunding of New Jersey public pensions:

According to the SEC’s order, New Jersey offered and sold more than $26 billion worth of municipal bonds in 79 offerings between August 2001 and April 2007. The offering documents for these securities created the false impression that the Teachers’ Pension and Annuity Fund (TPAF) and the Public Employees’ Retirement System (PERS) were being adequately funded, masking the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes, cutting other services or otherwise affecting its budget. As a result, investors were not provided adequate information to evaluate the state’s ability to fund the pensions or assess their impact on the state’s financial condition.

New Jersey is the first state ever charged by the SEC for violations of the federal securities laws. New Jersey agreed to settle the case without admitting or denying the SEC’s findings.

New Jersey is not alone: the SEC has now brought a similar action against the State of Illinois:

1. In connection with multiple bond offerings raising over $2.2 billion from approximately 2005 through early 2009, the State of Illinois misled bond investors about the adequacy of its statutory plan to fund its pension obligations and the risks created by the State’s underfunding of its pension systems.

2. The State omitted to disclose in preliminary and final official statements material information regarding the structural underfunding of its pension systems and the resulting risks to the State’s financial condition. Enacted in 1994, the Illinois Pension Funding Act (the “Statutory Funding Plan”) established a pension contribution schedule that was not sufficient to cover both (1) the cost of benefits accrued in the current year and (2) a payment to amortize the plans’ unfunded actuarial liability. This methodology structurally underfunded the State’s pension obligations and backloaded the majority of pension contributions far into the future. The resulting systematic underfunding imposed significant stress on the pension systems and on the State’s ability to meet its competing obligations.

3. During this same time period, the State also misled investors about the effect of changes to the Statutory Funding Plan, including substantially reduced pension contributions in 2006 and 2007 (“Pension Holidays”). Although the State’s preliminary and final official statements disclosed the fact of the Pension Holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule or on the State’s ability to meet its pension obligations.

The only surprising thing to me about this development is, well, that it took so long to develop.  If other states and their local muni issuers didn’t get the message about the pension obligations disclosure after New Jersey, will they get it now?  I can’t believe Illinois is the only state that has had this problem–it is just the most glaring example of it.

Currency Wars: The CIC Warns Japan Against Using China as a "Garbage Bin"

From the Wall Street Journal:

The president of China’s giant sovereign-wealth fund warned Japan against using its neighbors as a “garbage bin” by deliberately devaluing the yen, joining a growing number of Chinese officials sounding alarms about a potential currency war.

This follows several weeks of public wrangling, which began when Japan’s Shinzo Abe declared that he was determined to boost exports by devaluing the yen.  The Telegraph has a nice series of articles (here, here and here) on what has happened so far, and what a currency war might mean.  Paul Krugman opines that currency wars can be a net positive for the global economy (!).


image: http://www.infiniteunknown.net/2013/02/17/currency-wars-are-trade-wars/