This OECD working paper assesses the relative performance of different investment strategies, and whether the specific glide-path of life-cycle investment strategies and dynamic features in the design of default investment strategies significantly affect retirement income outcomes.
The institutional usage of exchange-traded funds is booming around the world, putting paid to any lingering doubt that the vehicles are meant for retail investors. Michael Bailey reports.
UK home-biased equity portfolios have lost almost 3 per cent due to the BP oil crisis, in contrast to diversified global equity portfolios which have lost only 0.33 per cent, according to a MSCI research paper.
Since the BP oil crisis began on April 20, the company’s share price has halved, and the impact on domestic-biased institutional portfolios shows the merits of allocating assets globally, according to MSCI’s research bulletin ‘The BP Oil crisis spills over to UK domestic portfolios’, June 2010.
BP stock represented about 6 per cent of a UK home-biased equity portfolio (70 per cent UK/30 per cent All Country World Index), and such a large position would have led to a loss of about 2.9 per cent in such portfolios, in contrast to a more globally diversified position’s loss of 0.33 per cent.
In addition to the sharp dive in the BP share price, the mounting pressure on BP to suspend dividends will lower the MSCI UK Index from 3.61 per cent to 3.10 per cent, the paper said.
Before the spill, the total risks of the five top oil stocks were broadly in line, and their specific risks were “very low” at 2 per cent, the paper said. But, from June 14, the total risk of BP had more than doubled to 48.75 per cent with a “dramatic increase in its specific risk from 1 per cent about 18 per cent”.
Commenting on this, MSCI advisory director Roger Urwin said the oil crisis would spill into two areas: equity portfolio construction and the concepts of ESG investing (environmental, social and governance) and universal ownership.
Urwin, who is also global head of investment content at Towers Watson, said the UK investor “has been badly served by an outdated idea of investing domestically first and overseas second” (The BP Oil Spill and ESG, June 2010 MSCI).
Institutional investors would now need to “think less about the weights suggested by current market valuations and more about weights reflecting future economic prospects”.
This “successful incorporation of ESG in an investment process” would be a “differentiator in the future”, he said in his paper.
Sovereign Wealth Funds (SWFs) from the Gulf swooped in to buy stakes in troubled financial institutions during the financial crisis – now there is speculation they are sizing up stakes in BP as the oil giant seeks to raise capital following the Deepwater Horizon disaster.
Investors from the Middle East were running a ruler over BP’s operations after the company’s announcement in June that it aimed to raise $10 billion by selling assets, Abu Dhabi daily newspaper The National reported this week.
Facing political and financial pressure, BP is understood to be selling non-core assets to raise cash, strengthen its business and direct more capital to clean-up efforts in the Gulf of Mexico.
Buying stakes in certain BP oil and gas projects – including production, processing and transport infrastructure and early-stage developments – would not be a financial or operational stretch for the Gulf region’s government-backed investors.
For weeks, analysts and energy industry consultants have speculated that the strategic investment arms of certain Arab governments would target BP shares at beaten down prices. This intensified when the company announced it would aim to raise capital.
Gulf SWFs have a history of investing in large companies in distress, and have garnered mixed results by doing so. The Abu Dhabi Investment Authority (ADIA) and the Qatar Investment Authority profited from realising their investments in British bank Barclays last year, but other deals have soured: ADIA is currently in arbitration with Citigroup regarding the terms of its $7.5 billion investment in the bank during November 2007.
Observers have speculated that instead of buying BP projects outright, Middle East investors could be more interested in providing capital for strategic partnerships in which BP would provide technical knowledge and experience, enabling it to redirect project funding commitments to the spill in the Gulf of Mexico.
In the Middle East, the oil giant runs gas projects in Algeria, Libya, Jordan and Oman. While these would be strategic interests for those nations, The National indicated that projects in the Caspian Sea would be attractive for Mubadala, a strategic investment company owned by the Abu Dhabi government, and the emirate-owned International Petroleum Investment Company.
BP’s lines into major liquefied natural gas deposits in Indonesia and north-eastern Australia, and coal-bed methane project in West Papua, are oriented towards Asia-Pacific markets which have recently been a focus for the governments of Qatar and Abu Dhabi.
Also, the Abu Dhabi National Energy Company, which is 75 per cent owned by the emirate, is exposed to oil production in the UK North Sea, and could be interested in expanding its presence there through selected BP projects.
The $300 billion China Investment Corporation (CIC) aims to sidestep official barriers to investing in the US by offloading its stakes in home-country banks.
The proposal would see the sovereign wealth fund (SWF) relinquish responsibility for the Chinese government’s majority stakes in the country’s largest banks, such as Bank of China, the Financial Times reported. The move would also end CIC’s status as a bank holding company in the eyes of the Federal Reserve.
This would free the CIC of certain restrictions – such as having to register with the Board of Governors of the Federal Reserve System and other measures constraining all US bank holding companies – when it makes investments in the US, where it is understood to be eyeing equities, bonds and real estate investments.
When the CIC was established in 2007, its stakes in domestic banks were valued at $70 billion, but it is not known if the bank will be recompensed for these holdings if it offers them up.
If the fund is paid for the shareholdings, its cash reserves will almost double, providing a lot of firepower for new investments but stripping it of future dividends – a reliable source of returns when many of its investments are too immature to outperform.
The FT cited unnamed bankers to assert the proposal was backed by Wang Qishan, the vice-premier in charge of finance.
The CIC was originally set up to invest China’s amassed foreign exchange reserves overseas, but became a key player in the country’s banking system when it took over Huijin, a holding company owning the government’s shares in big domestic banks.
This was seen as a coup for the finance ministry, since the creation of Huijin in 2003 was interpreted as a power grab by China’s central bank to curb the ministry’s power over the nation’s lenders and state-owned insurance companies.
Some senior policymakers in Beijing are believed to be pressuring for Huijin to be spun out of CIC and given ownership of the government’s stakes in financial groups.
Given these internal forces, some observers believe any restructuring of the CIC would more likely be attributed to domestic turf wars rather than gaining easier access to US markets.
Meanwhile, the CIC and AES Corporation, a global power generation and distribution business headquartered in the US, announced their proposed wind power joint venture in the US had been shelved. But AES stated its discussions with the CIC may resume as emerging US renewable energy legislation becomes clearer.
Proxy advisory firms have substantial influence on executive pay decision-making processes in US companies, however they have had little impact on the design of executive compensation programs, according to about half the respondents in a Towers Watson survey.
The Towers Watson”Executive Say-on-Pay Flash Survey”, conducted in June surveyed 251 US public and private corporations representing a cross section of industries, found only 12 per cent of respondents said they were very well prepared for the say-on-pay legislation, while 46 per cent said they were somewhat prepared, and just under a quarter (22 per cent) didn’t know if their companies were ready.
The financial reform legislation awaiting final action in the House and Senate includes a say-on-pay provision that would give shareholders of publicly traded US corporations a non-binding vote on executive pay.
Many companies indicated they were engaging with proxy advisors (44 per cent) to discuss areas of concern, meeting with key institutional shareholders (29 per cent) and preparing a formal communication plan (23 per cent).
“The influence of proxy advisory firms and institutional shareholders on executive compensation programs has increased steadily over the past few years and is likely to increase further in a say-on-pay world,” Andrew Goldstein, a leader in Towers Watson’s executive compensation business said. “As a result, we believe companies should be prepared for even closer scrutiny of their executive pay plans and policies, and will need to step up their communications with these groups through direct dialogue and even better proxy disclosure to be assured of strong support. Companies that fail to develop effective say-on-pay strategies and take steps now to make their compensation programs shareholder-friendly risk becoming lightning rods in this new environment.”
“Given the amount of work companies will need to do to adapt to life in a say-on-pay environment, it’s noteworthy that relatively few companies feel they are well prepared,” Goldstein said. “Companies understand that they’ll need to do more than simply describe their pay programs in their proxies and are beginning to take meaningful steps so that they are prepared.”
When asked what actions they were taking or planning in preparation for the say-on-pay legislation, nearly seven out of 10 said they were identifying potential executive pay issues and concerns in advance, while six in 10 said they were improving their compensation discussion and analysis to better explain the executive pay program’s rationale and appropriateness for the company.