If the smartest money invests for the longest term, then recent evidence suggests that its managers got ahead of the market downturns that have blighted the start of the year.
Sovereign wealth funds that have reported their year-end allocations for 2015 – that is, not many of them yet – show a clear reduction of risk appetite.
Australia’s Future Fund, with A$118.4 billion ($85.3 billion) under management at the end of 2015, made big reductions in stocks last year. By December 31 only 6.5% was in Australian equities, compared with 8.8% a year earlier; only 17.2% was in global developed market equities, compared with 20.9%; and 7.3% in emerging market equities, compared to 9.4% a year earlier. All told, the fund pulled just under $6 billion out of stocks, most of it going into cash, with other increases in debt securities and private equity.
“We have gradually reduced the level of risk in the portfolio through 2015, reflecting our view of the investment environment,” said David Neal, managing director of the Future Fund, when announcing the numbers. He added that the fund has rebalanced its private equity portfolio, “locking in some of the strong gains which had been achieved”, and lifting cash holdings to 20.6% of the fund.
For Singapore’s Temasek sovereign fund, its next annual report will make interesting reading because, unlike most other sovereign vehicles, it is almost entirely invested in equities.
Temasek enjoyed an outstanding financial year to March 31, 2015, returning 19.2%, but it did so partly because of the dramatic rise in the value of Chinese shares to that point. At the end of that financial year, China represented 27% of the portfolio, versus 23% two years ago. When last disclosed, China Construction Bank was the joint-biggest exposure in the portfolio, alongside homegrown DBS.
Being on the right side of the rise in Chinese values was a good move. The climb continued until June, but since then, market falls have wiped out those increases. The big question is whether or not Temasek got out before that happened. Since it cannot shift into more defensive classes like fixed income, was it able to deploy money anywhere safer? All will be revealed in July, when Temasek releases its review for the year to March 31, 2016.
Elsewhere, funds in oil economies are grappling with another problem: withdrawals. The drop in foreign reserves at the Saudi Arabia Monetary Agency is covered elsewhere on euromoney.com, and other Gulf states do not disclose their total sovereign wealth assets, but Norway gives us an indication of how funds built on oil are now being deployed.
Øystein Olsen, governor of Norges Bank, the Norwegian central bank, said in February that the government may need towithdraw as much as $10 billon of assets this year. Granted, at the time of writing, the fund had the equivalent of $810 billion under management, almost certainly the largest in the world. Nevertheless, a requirement to withdraw such a large amount has come much earlier than Norwegians expected. The national budget in October only envisaged taking NKr4.9 billion ($569 million) – itself a record – but the further decline in the oil price since then has led to a far greater need to use the funds.
“In the course of three years, spending of oil revenues has increased by as much as in the 10 previous years,” Olsen said. “The fall in oil prices will reduce Norway’s national wealth. The GPFG [the sovereign wealth fund] may be close to its peak.”
Still, even sums as large as $10 billion don’t force a change in strategy, or even a sale of assets, at Norges Bank. So large is the portfolio that the fund receives about NKr200 billion every year just from dividends and interest payments – enough to cover the mooted withdrawals comfortably.
The other challenge for sovereign funds in difficult markets is managing expectations, and explaining to the public – which ultimately owns the funds – when returns are negative. In this respect the New Zealand Superannuation Fund, which logged a 3.57% loss in January 2016 but is still up a remarkable 9.21% a year since inception in 2003, is instructive.
“Because of its weighting to growth assets, the fund can experience large short-term movements,” it told investors in February. “As a long-term investor we have a greater than average ability to withstand this volatility.”
Asset allocation disclosures show that it has an even greater allocation to growth assets now, with 65% to global equities, as of January 31, than it did six months ago: a sign that someone, at least, sees value out there.