SWFs Raise the Bar: From Passive Shareholders to Active Investors

(January 14, 2010) — After the 2008 global financial crisis that made investors increasingly conscious of risk, sovereign wealth funds will raise the bar in managing their investments, according to State Street Corp., the world’s biggest money manager for institutions with $1.7 trillion under management.

In 2007, several SWFs bought into major banking and financial groups, withholding their rights to exercise shareholder votes in some companies, reports IPE.com. Today, Boston-based State Street Corp. said SWFs will start taking more active roles in the companies in which they invest, reports Bloomberg.

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“I do think that in 2010 shareholder governance is an important topic” for the funds, said John Nugee, the London-based managing director of the official institutions group at State Street Global Advisors, in a phone interview with Bloomberg. “The totally passive approach of: we will not use our votes, we will not claim our directorships, I don’t think anybody believes that that is the optimal way forward.”

State Street Global Advisors, the investment management arm of State Street Corp., conducted a study that showed the 37 biggest SWFs worldwide amount to $3 trillion in total, or an average of $85 billion each. At least eight of those are worth $100 billion or more. Some of those funds were created specifically to assist in public pension management. About 70% of the world’s sovereign wealth is based on hydrocarbons, such as oil or gas, and nearly half of it is based in the Middle East, with a further quarter in Asia, according to State Street.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(January 13, 2010) — Managers of the California Public Employees’ Retirement System plan on harnessing the fund’s tremendous size to invest in infrastructure.
CalPERS, which has about $200 billion in assets, aims to increase the percentage of its investments in infrastructure. The fund expects to invest between 40% and 70% domestically, and between 20% and 40% outside the US. The fund’s acceptable range of infrastructure investment is up to 3% or $6 billion.

The funding gap for infrastructure in the United States has grown to $2 trillion because government agencies and utilities have been unable to secure funding, said Glenn Ezard, senior consultant with a financial and benefits consulting company, according to Portfolio. While low-risk projects include existing toll roads and water-treatment plants, high-risk infrastructure projects include building projects and merchant power plants.

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Portfolio reports the following CalPERS allocations:

10% to 40% for existing and operating investments that have cash yield as the dominant part of their return. Expected return: 3% to 5% over CPI.
40% to 70% for private value-added investments. Expected return: 5% to 7% over CPI.
Up to 20% is targeted at private opportunistic investments, e.g. high-risk/high-return investments. Expected return: 8% to 12% over CPI.
Up to 10% for public-project investments. Expected return: 4% to 6% over CPI.

In December, the fund announced its first lead consultant, Meketa Investment Group, Inc., for its young infrastructure program. As of then, CalPERS had committed about $700 million to infrastructure investments. Besides infrastructure, the other class components are commodities, forestland and inflation-linked bonds.

CalPERS provides retirement benefits to more than 1.6 million state, school and local public employees, retirees and their families.