Nothing Lasts Forever - Imagining the Life Cycle of a Sovereign Wealth Fund

Published 27-Sep-2016

The proliferation of Sovereign Wealth Funds (SWFs) across the globe is a fairly recent phenomenon with more than half of today’s SWFs having been created in the 21st century. Nonetheless, despite the relative youth of these institutions, the default assumption is that they will be permanent features of their respective government operations.

We believe this assumption to be not only flawed but analytically unhelpful as it restricts free thinking on any fund’s investment strategies. As a permanently ongoing concern, bureaucratic inertia and intellectual rigidity can replace analytical rigor. In other words, there is a paradox where long-term oriented funds use short-term metrics as guidance. In this respect, funds expecting to exist forever may not maximize their stakeholders’ interest, as they seek to emulate annual or medium-term targets instead of long-term goals. Among investment professionals, this typically takes the shape of measuring fund performance to select benchmarks, established indexes or peer performances — but what if these are all incorrect reference points? In this paper, we are suggesting a thought experiment for funds to reframe their goals by focusing and rearticulating their core mission. For example:

  • What is the ultimate purpose of the fund?
  • How would success be measured?
  • What time frame is appropriate for the fund’s mission?
  • How could one quantify the liabilities of a SWF?

The last point is especially relevant, as all investors have liabilities. SWF liabilities may be implicit and/or undefined, but they exist. The development of a portfolio solution should reflect a thorough understanding of these liabilities and their associated risks.

By addressing these questions and others, we aim to devise an alternative prism to build a customised “benchmark” applicable to different types of fund. We simulate this exercise with a simplified case study of an intergenerational SWF.

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