INSIDER

New endowment model: follow the SWFs

Some sort of shape is starting to take place, post-global crisis, as to how the biggest, longest-term investors are spending their money. If the endowment model was the one to follow for the past 20 years, the sovereign wealth fund model may be the one to follow for the next.

Greg Bright*

Endowment-envy swept the world in the early part of this decade, which was probably a decade too late to reap the benefits from following the very clever investment strategies of the likes of Yale and Harvard. By the time of the global financial crisis, the envy had faded.

But investors should think about why the endowment model of investing worked so well for as long as it did. If we can isolate the good things and then transport them to the post-crisis world, a new and better model may emerge. And, as always with investing, if the strategy is right, those in first will be rewarded.

What the big endowments did was invest directly, with their own teams of specialists and professionals, in areas where they had particular expertise, such as private equity and real estate. They then laid off the other parts of their portfolio in much the same way as big pension funds do anywhere, with a mix of growth and defensive allocations.

The problem was that in the crisis, correlations all went to one, and liquidity became a big issue. Endowments usually have to pay some income each year to their associated institution (such as a university), the same as a pension fund does with its retirees. But endowments don’t have a sponsor to top up the pot after one or two negative years. They have to rise and fall on their own merits.

Sovereign wealth funds are also a mixed bag of investors. Some of them have target dates for delivering on returns, some have target returns over various periods. Some are just set up to “make money” for the country by investing resources or foreign exchange reserve build-ups. Some are very transparent, others remain opaque.

What they have in common, though, is a single shareholder – a government – with a legislated genuine long-term aim for the fund’s investments.

Their investments, over the past 10-or-so years when the SWFs around the world have started to attract headlines, have also been a mixed bag. But a common element is the desire to take significantly large stakes in companies or other assets which reflect a long-term theme.

SWFs have, for instance, waded into hostile takeover battles for resource companies. They have invested directly in big infrastructure projects. And they have backed IPOs of established businesses which are targeting future growth areas.

This thematic focus has exacerbated political concerns about some SWFs being too nationalistic. Those from resource-importing countries taking big positions in resource exporters can be perceived as politically inspired. Or not.

But all investors can identify themes and direct their asset allocation accordingly. SWFs have the added advantages of fire-power to get a seat at any table and the inhouse resources to analyse and negotiate their positions.

A classic example of a thematic direct investment by a SWF from a resource-importing country, China, was written up last week in a client newsletter by HSBC, the global bank and fund manager.

In its case study, HSBC focused on a food stock which encompasses the two themes of globalisation and increasing demand for higher-protein food. The stock is Noble Group, based in Hong Kong and listed in Singapore. Last year, the China Investment Corporation, China’s $300 billion SWF, bought 15 per cent of Noble for $850 million.

Noble has operations in a lot of countries, vertically integrating its business and clipping the ticket at various points. It started life as a commodities trader but has grown into a supply chain manager of agricultural and energy products. One of its products is soya beans.

Soya beans, which have East Asian roots through history, are grown now mainly in South America and used for a range of products from animal feed and edible oils to soaps and biodiesel fuel.

Noble sells fertilisers to the South American soya bean farmers, buys the grain from them, stores it in Brazil and Argentina, crushes it, ships via its Noble Chartering subsidiary around the world – including China, which takes 37 per cent of the output – and sells to wholesalers.

Ricardo Leiman, Noble’s Brazilian-born chief executive, was quoted in the HSBC newsletter as saying that Noble and CIC will continue to look together for investment opportunities.

*Greg Bright is the Beijing-based publisher of Top1000Funds.com

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