Fund managers are being urged to spend more time courting sovereign wealth funds in frontier markets amid a growing trend for established state entities to insource asset management.
A proliferation of SWFs are emerging in resource-rich nations that may only recently have started to exploit their mineral bounty, said Chris Wright, consultant for Cerulli Associates, speaking at last week’s Fund Forum Asia 2012 conference. He cited examples as East Timor, Papua New Guinea, Mongolia, Azerbaijan and Nigeria.
“I think it’s interesting to see that newer funds have taken the model of starting by outsourcing pretty much everything,” observed Wright. “After that they steadily build expertise to do it themselves before gradually pulling [outsourcing] back.”
He pointed to Korea Investment Corporation (KIC), which in its formative stages in 2006 outsourced 60% of its assets for external management, but by 2010 this figure had dropped to 29%. “CIC is likely to do the same,” suggests Wright.
He acknowledged that GIC, Adia and Temasek were ahead of the pack in terms of in-house expertise, with GIC barely outsourcing at all having built two internal asset management businesses.
“There is a trend of less outsourcing, and where it is outsourced is in areas with a clear and high alpha generation,” he noted, reflecting that while Adia outsources 80% of its asset exposure, 60% of that is in passive investments.
But he was also eager to dispel fears among the fund management community of a future devoid of SWF business (an understandable line to take in a room full of fund managers).
Wright pointed to overall volume growth: Cerulli estimates that Asia SWF volumes tripled in five years to $1.27 trillion in 2011, from $432 billion in 2006.
“Since volumes keep growing, even if the proportion of [SWF] outsourcing shrinks, the overall total value of assets that goes to fund managers perhaps does not,” he said.
He also stressed that new funds naturally outsource, with the $9.3 billion East Timor SWF having turned first to Schroders, then State Street, after an initial period of treasuries exposure.
In general Wright suggested now was an interesting time to be looking at sovereign funds, given that the big players in China and Korea were getting to a point in their performance track records after the global financial crisis at which you can start to see what their long-term allocation is going to look like. "This is instructive," he said.
He pointed to three trends: growing transparency via annual reports and increased interest in both emerging markets and alternative assets.
The shift towards EM is most clearly illustrated by Temasek, which has shifted to a 40:30:20:10 model: 40% exposure to Asia ex-Singapore, 30% to Singapore, 20% to OECD nations, and 10% other (largely Latin America).
Wright noted that Temasek had increased its China bet this April by buying $2.3 billion worth of ICBC’s Hong Kong-listed shares from Goldman Sachs, and reflects that this is in keeping with its renewed focus on emerging markets.
GIC, meanwhile, has 27% of its investments in Asia, with EM exposure increasing from 10% to 15% last year; CIC has just under 30% in Asia and 5% in Latin America; and Adia has 20% of its funds in EM equities, and 25% in emerging markets overall.
Wright also noted growing SWF interest in alternatives, speaking on the day it emerged that CIC and BlackRock had signed a joint-venture agreement which many suspect is a private equity fund.
Wright pointed out that GIC was 26% exposed to the segment while CIC had 21%, particularly private equity and infrastructure. Further, KIC's newly appointed CIO Don Lee is expected to continue his predecessor Scott Kalb’s stated goal to increase the sovereign fund’s exposure to alternatives to 20%, from 6% at present.
“These funds have enormously long time horizons and are exactly the type of institutions that should be looking at alternative long-term methods as revenue generation,” said Wright.
In terms of how SWFs might react to sovereign debt problems in Europe, Wright pointed to CIC’s position as instructive, with a senior official having stressed it would not bail out Europe, although it might seek to pick up assets selectively.
“Generally across the board there is a greater reticence to be a white knight and to come in and take a big stake in a flagging western institution,” concluded Wright. “They will be opportunistic, but not quite as they were before.”