The Contrarian World of Sovereign Funds | Chief Investment Officer

Sovereign wealth funds (SWFs) have become more free-thinking and contrarian following the financial crisis, according to analysis by State Street Global Advisors (SSgA).

Portfolio data collated from 2002 to 2014 indicated that sovereign funds invested similarly to one another in the years leading up to the banking crisis, but began to diverge after 2007. Divergence has accelerated since 2012, SSgA’s analysis showed.

SWF allocation trends. Source: SSgA Between 2002 and 2007, funds tended to move out of fixed income and into equities, as stock markets around the world rose. After the 2008-09 banking crisis this trend weakened—although appetite for unlisted assets grew rapidly—and by 2014 the number of SWFs buying or selling equities or bonds was broadly balanced.

“While they each have their particular reasons,” wrote Elliot Hentov, head of policy & research at SSgA’s official institutions group, “it does suggest an increasing divergence of views about market opportunities and portfolio management.”

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SWFs’ asset allocation has also differed dramatically from the overall trends in asset management globally in recent years, Hentov found. Focusing on the period 2012 to 2014, he found a strong trend globally out of fixed income and into equities—but SWFs on average sold down equities in favor of fixed income and private markets.

“While we could point to only one recent time period, the opposite trends among SWFs and the larger asset management industry are remarkable,” Hentov said. “We can only speculate on the reasons for this divergence, but long-term thinking and fewer tangible liabilities presumably allow SWFs to detach investment decisions from short-term market cycles.”

In his analysis, Hentov also observed a divergence in approach between the largest funds and the smaller, newer SWFs.

The largest commodity-driven funds, such as those from Norway and the Middle East funded by oil sales, were shown to have rebalanced out of fixed income in favor of equities between 2002 and 2007, while smaller funds did not make a similar move until much later.

Overall, between 2002 and 2014 SWFs’ average asset allocation evolved from being reliant on fixed income to a much greater focus on private market assets. The data “suggest funds have stabilized near a 40-40-20 asset allocation to cash and fixed income, equities, and private markets respectively,” Hentov said.

SWF allocation changes. Source: SSgA Read Hentov’s paper, “How do Sovereign Wealth Funds Invest? A Glance at SWF Asset Allocation”.

Soros Fund Management has named Ted Burdick CIO following Scott Bessent’s end-of-year departure to launch a hedge fund.

The appointment was announced in a letter distributed to employees and obtained by CIO. Burdick has been affiliated with George Soros’s firm since 2000, when he joined as an analyst in London. Most recently, Burdick led the $30 billion family office’s internal distressed debt and arbitrage groups.

Burdick replaces Bessent, who announced in August that he would leave Soros to start his own fund after four years as CIO. The hedge fund startup, Key Square Group, launched this week with $2 billion from Bessent’s former employer, and will manage $4.5 billion by the end of its first quarter, according to Bloomberg.

Soros itself was a hedge fund until 2011, when it closed to outside investors, and still operates like a hedge fund. Renee Neri, a principal at executive search firm Heidrick & Struggles, said the particular investment style of a family office can have a big impact on who would make a suitable CIO candidate.

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“Given the platform, one would need a CIO who deeply understands operating in a hedge fund-like environment,” Neri said.

In Neri’s experience as a recruiter, CIO positions at family offices like Soros can be very in-demand, depending on who the family is.

“Typically it’s dictated by the family, who the principal is, if it’s someone who has a marquee name, someone who is exceedingly respected, if they’ve done interesting things—typically, that draws a lot more attention,” Neri said. “The reputation of the office itself and the family, whether it’s been a stable environment—that is another factor people think about when they’re thinking about family office CIO roles.”

Once a prospective hire nabs the job, Neri said the two most important qualities of a successful tenure are trust and patience.

“The key to success in operating in a family office environment is the ability to establish a pretty quick trust-based relationship with the principal,” Neri said. “This is not your own P&L (profits and losses) that you’re managing, this is someone else’s capital that you are overseeing.”