Energy Investments Spark Interest from Sovereign Wealth Funds

(September 23, 2013) – More than $76 billion has been invested into energy assets and companies in the past five years from sovereign wealth funds across the world.

Data from the Sovereign Wealth Fund Institute found that $76.3 billion was directly invested in energy companies and assets by these government-backed agencies since 2008, with Western Europe receiving most of the money.

More than half of the money invested—$40.8 billion—was invested in Europe, with the UK among the top recipients.

North America received $11.8 billion in investments from sovereign wealth funds in energy stocks. Stock favourites included Royal Dutch Shell, BP, BG Group, and Total.

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Last week, the Alaska Permanent Fund committed $750 million to private-equity giant Carlyle, the majority of which will be invested in energy assets.

Green energy is also becoming more popular—earlier this month Singapore’s GIC bought more than 5% of the Energy Development Corporation, the biggest geothermal company in the Philippines.

And in Norway, the anti-taxation and anti-immigration party Progress Party has declared it wants to take 10% of Norway’s Government Pension Fund Global and use it to invest in, among other things, green energy. The political group will hold the balance of power, having entered the government for the first time this year.

It’s not just sovereign wealth funds who are keen on energy investment however: pension funds are getting in on the act too.

A growing number of European pension funds are throwing their investment might behind projects that use waste materials to produce enough energy to meet 21st Century needs.

Danish pension provider PensionDanmark announced a joint venture with Burmeister & Wain Scandinavian Contractor in August to build, own, and operate biomass power plants internationally.

The first power plant to open will be in Lincolnshire in eastern England. It will be primarily straw-fuelled and produce enough energy for 70,000 households and result in an annual CO2 emissions reduction of around. 300,000 tonnes.

The move follows an investment by the Merseyside Pension Fund, one of the largest in the UK public sector, in an anaerobic digester in north Wales. The plant was opened this year by HRH the Prince of Wales and will begin operations later this year.

The investment benefitted north Wales, Investment Manager Paddy Dowdall told aiCIO in July, by helping the local authority deal with its mounting waste pile and providing renewable energy.

(September 23, 2013) – US endowments have high expectations of private equity, above all other asset classes, a study has found.

The typical endowment expected private equity to achieve 3.9% alpha above a portfolio of conventional stocks, as of the end of 2012, the researchers found.

The authors of “Investment Beliefs of Endowments” were Andrew Ang, a Columbia business school finance professor, Andres Ayala, a PhD candidate at the same institution, and Yale School of Management finance professor William Goetzmann.

The three researchers used a Bayesian probability framework to estimate endowments’ implicit beliefs about their ability to capture excess returns. The study’s core dataset covered asset allocations for approximately 800 US university endowments from 2006 to 2012, which schools voluntarily reported to the National Association of College and University Business Officers and Commonfund’s endowment institute.

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Endowments were less optimistic on hedge funds. According to the study, alpha projections for this asset class averaged 0.7% per year.

These expectations for alternative asset classes have increased over time, as have allocations, despite a dearth of long-term evidence to support a favorable risk-return profile.

Indeed, based on past returns of alternative indexes—the HFRI fund of funds and S&P’s listed private equity tracker—endowments could have the reverse expectations, the authors stated.

The hedge funds index had an average Sharpe ratio of 0.65 from 1990 through 2012, trumping the S&P 500 (0.31), Ibbotson’s long-duration government bond index (0.25), and the MSCI non-US equities index (0.24). From 1994 through 2012, the private equity tracker earned a Sharpe ratio of 0.14.

Endowments’ expected level of alpha from private was significantly higher than it had been historically, the authors pointed out.

The researchers identified two possible explanations for this: “First, endowments may think that they have superior selection skills and are able to pick the managers that generate the highest alpha. This selection skill is not reflected on historical measures of performance. Second, they may expect higher conditional risk premia on liquidity or other risk factors in the future.”

Access the entire paper here.