Transcript Демонстрационные материалы

Presentation for Adam Smith Conference
THE ROLE OF ALTERNATIVE
INVESTMENT IN SWF
MANAGEMENT
Vavilov A. P.
1. Financial assets of Russia



The volume of Stabfund (Stabilization fund)
by the beginning of 2008 – $ 157.5 bn.
The Reserve Fund (RF) – 10% of GDP; the
predicted amount by the beginning of 2008 г.
- $ 122 bn.
The predicted amount of the National
Welfare Fund (NWF) – $ 30-40 bn.
2. The largest world SWF (size over $ 300 bn.)
Country
Fund
UAE
Singapore
ADIA
GIC,
Temasek
Global
Various
CIC, CHI
Norway
S. Arabia
China

Size, $ Year of
Basic export
bn
foundation income
875
1976
Oil
438
1981,
Non1974
commodity
340
1990
Oil
300
n.a.
Oil
300
2007,
Non2003
commodity
Source: Deutsche Bank Research
3. Global financial assets ($ trl., 2005)
Bank assets
63,5
World GDP
45
Stock market capitalization
42
Corporate securities
36,3
State securities
23,4
Investment funds
21
Pension funds
17,9
Insurance companies
16
Reserves (excluding gold)
4,2
SWF
3,1
Hedge funds
1,4
0
10
20
Source: Deutsche Bank Research
30
40
50
60
70
4. The new rules for the Sovereign Oil and Gas
Fund of Russia
 RF is 10% of GDP; NWF is residual.
 NWF will not increase if the oil price drops
below 50-52 $/bar.
 On the contrary, the RF in real terms will
grow automatically with GDP growth and
ruble appreciation.
 The ration of RF to NWF will be around
4:1.
 For a moderate proportion of shares and
debt instruments in the NWF as 50%:50%,
the fraction of shares in the Russian SWF
will be only 12.5%.
5. Norwegian Pension Fund global
Size: $ 340 bn. (130% of GDP)
Asset structure
Property structure
20%
40%
60%
Bonds
80%
Stock
Source: NorgesBank
State securities
Corporate securities
6. Dynamics of the pension fund Global
(exchange rate of krone to dollar is 5.7 NOK/$)
Source: NorgesBank
7. The asset structure of the oil SWF funds
Fund
Fraction of Size, $ bn.
shares, %
ADIA (UAE)
near 50
875
Global (Norway)
60
340
KIA (Kuwait)
> 50
250
QIA (Quatar)
> 50
40
Stabfund (Russia)
<12*
158
*expected
under new rules
Source: RGE Monitor, DB Research
8. Does Russia really need the financial reserve
10% of GDP?




A) Protection against possible financial crisis?
B) Total official foreign reserves ($ 476 bn.)
should be taken into account;
C) The liquidity of state assets is the problem
for monetary authority rather than the Fiscal
authority;
D) Political economy: liquid state assets are
weakly protected from lobbyist pressure.
9. The long-term approach to financial
management by the State
The long-term task of the State
The long-term targets for assets return
Minimization of long-term risk under given targets for return
Optimal strategy of financial management
Short-term levels of assets risk
10. A dynamic model of financial management
Informal description
A) The target level of NWF by some year;
B) The target level of long-term return on
asset portfolio of the state;
C) The objective function is minimum of
integral risk (time-weighted volatility of
return);
D) The dynamic budget constraint of the
fiscal authority;
F) The short-term risk-return ratios are
determined from the global portfolio.
11. The short-term risk-return ratio in the
dynamic portfolio problem
Short-term
return
Efficiency
frontier
NWF
portfolio
rt
Global
market
portfolio
r0
 t2
Short-term risk
and
- expected short-term return and variance of the
market portfolio in period t,
- riskless return.
12. Optimal time profile of short-term risk in
the dynamic financial management problem
Risk level
Risk level
Time
T
A) «Patient» state (high
discount factor)
Time
T
B) «Impatient» state (low
discount factor)
13.Volatility of short- and long-term financial
investment
Annual standard deviation of
American shares real return
1959.01-2004.12
Standard deviation, %
20
15
10
5
0
0
5 10 15 20 25 30 35 40 45 50
Horizon (years)
Source: Harvard Business School
The standard deviation for shares return
decreases with investment horizon
14-а. Long-term risk and return
Spreads of annual returns in 1926 – 2005
US shares
Source: Harvard Business School
14-b. Long-term risks and returns
Spreads of annual returns in 1926 – 2005
T-bills
Source: Harvard Business School
15. Principles of dynamic portfolio management
А) Standard diversification for short term riskreturn management based on global market
portfolio;
Б) Passive portfolio management through
selection of “beta” (the major part);
В) Active portfolio management and hedging
through selection of “alfa” (the minor part).
Excess return equation:
Excess return      Market risk premium
16. Implementation 1: Making beta
1. Standardized formal procedures of passive
management (should be specified in the
budget code)
2. 70-80% of government assets should be
invested in a globally diversified market
portfolio including corporate equities, bonds,
commodities, real estate, derivatives
(Portfolio of Norwegian fund Global embraces
3500 issuers.)
3. Passive style of management to ensure
market returns. Long-term contracting with
large global financial intermediaries
17. Implementation 2: Making alpha
1. Alternative (market-neutral) instruments
The state agency provides collateral.
2. Incentive problems (e.g. making beta instead of
alpha). Solution: a) managerial fees and risk sharing
between the government agency and the financial
intermediary; b) specification of investment style in
the short-term (annual) contracts
3. The issues of monitoring and control.
Solution: deals should pass through a special
account of the state agency (like Swedish pension
fund AP-7). Transparency will remove unjustified
political pressure on financial management.