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Are SWFs the New Endowment Model?

By Pension Pulse on 10/26/2010 – 6:25 pm PDTLeave a Comment

Greg bright of reports, 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.

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

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Tags: allocation, , , SWFs, target dates, target returns

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