On September 30 2010, the market value of the LIA was $64.18 billion, $24.7 billion of it in an opaque category called ‘subsidiaries’. The rest broke down as more than half cash and deposits, then around 10% apiece for ‘equity: non strategic’, alternatives and ‘others’; and just under 10% apiece for bonds and ‘equity: strategic’, followed by a small amount in real estate. The document sets the portfolio breakdown between actual assets – which is where the figures above come from – and ‘LIA Assets allocation’, which appears to suggest a target allocation. If it is, the LIA was absolutely miles from its benchmarks: bonds were meant to account for almost 40% of the portfolio, with nonstrategic equity about 25%, cash and deposits 10%, alternatives 10%, strategic equity 10% and real estate about 8%.
Europe dominated. Among bond and equity holdings, 53% were denominated in euros, 68% of total assets were in Europe, and 75% of all equities: dramatically higher than any comparable sovereign wealth fund. Only 19% of the fund was in north America, 14% in north American equities, and only 33% in dollars – the bulk of that in deposits and bonds.
In particular, the fund was very heavily invested in Italy: in equities, about 15 times higher than the benchmark, accounted for about 30% of the stock portfolio. UniCredit and ENI were the biggest holdings – UniCredit’s book cost was $1.326 billion – followed by a more typical blue-chip mix including Siemens, Pearson, Repsol YPF, General Electric and Allianz.
In 2010, and probably still, the Libyan central bank held a great deal of the LIA’s assets: on September 30, $17.3 billion was on deposit there (notably, HSBC also had just over $1 billion in a liquidity account). Other interesting disclosures are that Nomura, Western and BNY managed external bond portfolios for the LIA, between them holding a market value of $1.543 billion in 2010, all of them in global government fixed-income mandates for one to three years with a minimum rating of A/A2.
But the real meat of the report comes in the section around alternatives, which accounted for $4.5 billion of assets in September 2010, and which KPMG was recommending be reduced to $2.4 billion. It is notable that more than half (54%) of the alternative portfolio at that time was not in the common sovereign wealth staples of hedge funds, private equity or infrastructure, but in structured products.
In a damning set of slides, the management then went through several of the individual holdings. One was Notz Stucki, with which the LIA had invested $300 million, a figure that had dropped by 18% since by September 2010, an underperformance of 15% versus the MSCI world index, in exchange for $5 million of fees. "High fees for no added value," noted the report. Next up was Permal, which also received $300 million, and had lost 40% of it in exchange for $27 million in fees. "Very high fees for no value. Very poor structure and management," it said. Next: Palladyne, also $300 million. "To date we have paid in excess of $18 million in fees, for losing us $30 million." Then BNP, down 23% after $18 million in fees. "High fees have been directly responsible for the poor results." Credit Suisse, down 29% after $7.6 million in fees. "Structure means we are paying CS, Pimco and Duet for adding no value."
In conclusion, the report noted: "Market up by over 25% since Jan 2009, funds have registered a decrease in the same period. Our funds have scarcely moved and therefore if they did not increase during the last two years it is unlikely they will perform in times of uncertainty." KPMG recommended liquidating funds immediately to guarantee capital preservation and reduce expenses.
And that wasn’t the worst of it. KPMG then turned to Millennium Global Investments, with which the LIA had invested $100 million apiece in three funds: global natural resources, high yield and emerging credit. By the time of the KPMG report, one of these – apparently the emerging credit fund – had gone bust completely. It’s clear that this relationship had turned nasty. "When the team met with James Guiang and Zarko Stefanovski to discuss the issue of fee rebate and reduction going forward, the team was struck by the lack of cooperation by the company, with both rebate and reduction in fees being rejected," the report says. "The team strongly recommends that with such evident problems and a company in disarray that our investment is not safe."
It seemed that everywhere the LIA alternatives team put money in 2009 and 2010, it met disaster. A $300 million Lehman Brothers CPPI investment also appeared to vanish from the books following Lehman’s own demise, while a Société Générale strategic equity fund holding went from a market value of $566.4 million to $286.5 million in the space of a single quarter. An ironically named ‘Commerzbank outperformance note’ lost 26.61% in three months.
Worse by far was a series of externally managed equity derivatives mandates, held at a book cost of $2.246 billion, which had fallen in value to just $311 million by September 2010. It is understood that the Goldman Sachs investments referred to in the main article were within this category. Unlike the rest of the alternative book, there was no accompanying commentary on this. Looking at the numbers, there really wasn’t any need.