With Europe in a Financial Slump, China Investment Corp Voices Support

(November 26, 2011) — As Europe battles a sovereign debt crisis, China’s sovereign wealth fund may offer “indirect” aid to the beleaguered region.

Jesse Wang, executive vice president of China Investment Corp., told the Economic Times earlier this month that the Chinese fund would likely not be the primary channel of aid if China helps ameliorate the sovereign debt crisis. “However, if during such a process there are good investment opportunities in Europe and if CIC’s investment helped the destination company or country to recover and developed the economy, that would be indirect support.”

World Bank President Robert Zoellick recently announced that China is among the countries that may be willing to support Europe through the International Monetary Fund (IMF) if policymakers agree on a plan.

The potential commitment voiced by the Chinese sovereign wealth fund comes as industry leaders are foreseeing a European recession. In September, Mohamed El-Erian of Pacific Investment Management Co. (PIMCO), which runs the world’s biggest bond fund, said that he is forecasting a European recession in 2012.

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El-Erian, chief executive officer of PIMCO — with $1.34 trillion in assets under management — asserted that there will be little-to-no economic growth in industrial nations over the next year as Europe’s economy contracts by up to 2%. Meanwhile, he said that the US will stagnate yet volatility will continue as a result of policymakers in Europe and the US having failed to take corrective action. “For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero. Emerging economies will maintain faster growth, albeit not as high as the last 12 months,” Bloomberg cited El-Erian as saying during a September 24 interview in Washington.

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

(November 22, 2011) – The effects of large endowment losses are still being felt in Harvard Yard.

According to Harvard Magazine, the University ran an operating deficit of $130 million in the fiscal year ending June 30, 2011. This was partially the result of large losses in Harvard’s endowment in 2008, when the fund lost 27% of its value. “In 2008-2009, the $11-billion decline in the value of the endowment caused the University to retrench and to begin reducing subsequent distributions from the endowment to support the operating budget—an effect that diminished the largest single source of revenue in fiscal 2010 and 2011,” according to the school.

Daniel Shore—vice president for finance and chief financial officer for Harvard—stated that the University was continuing to adapt to the reduction in contributions from the endowment, which is managed by the Harvard Management Company and CEO Jane Mendillo. “Those adaptations involve taking steps to enhance efficiencies and reduce costs ‘with urgency, but a thoughtful urgency’—for example, multiyear transitions to new administrative structures and processes for the large library system, and consolidated information-technology operations,” the magazine wrote.

The deficit was actually mitigated by an uptick in endowment distributions (as measured by percentage) to the University, according to the school—although this uptick percentage (4%) was based upon a lower endowment capital base, the result of the 2008 crisis. (The current endowment size is still approximately $5 billion below its high-water mark.) A further increase in endowment distribution is expected in the next fiscal year.

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The University has also altered the way it smoothes endowment returns, according to the school. “For the past two fiscal years, Shore said, the Corporation has determined the future endowment distribution using a so-called ‘smoothing rule’ that adjusts gradually for large swings in endowment value (in either direction), in place of a more informal rule of thumb,” according to the magazine. “That has the effect of sustaining University operations despite a severe decline in endowment value, like that suffered in fiscal 2009, and taking advantage only gradually of the occasional very strong recovery years.”

In response, there has been “very significant progress” regarding steps taken to lessen the University’s holistic financial risk, according to Shore. One major step: greater liquidity.

This is not the first mention of liquidity improvements at the nation’s largest endowment. In October 2010, as part of the school’s strategic shift towards a more liquid portfolio, the university revealed it has more than tripled its reserves of cash, US Treasuries, and other liquid assets to $1 billion by the end of fiscal year 2010 from $300 million in June 2008.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>