I’m no expert in geopolitics. I read all the usual stuff that you probably do, but I don’t pretend to have any great insight into the goings on inside Kim Jong-un’s head. And, so it seems, neither do any of my friends who run public pensions and sovereign funds.
In the past three weeks, three different people have told me that they’d like to hire some sort of geopolitical analyst to help their fund better understand the political risk exposures embedded (i.e., hidden) in their portfolios. And, after the Euro crisis, the Arab spring, the North Korean missile launch, the Bo Xilai case and all the rest, it’s not all that surprising that these senior folks are looking for some better understanding of geopolitics. All these factors could impact investment returns in a big way.
(Cue geopolitical consultants’ smug look of superiority. ... I said ‘cue the look of superiority...’ Oh, what’s that? That’s your standard look? OK, carry on looking smug then.)
Political risk refers to a government denying or restricting the rights of an owner in a way that reduces the value of the investment. The Multilateral Investment Guarantee Agency (MIGA) includes such risks as war, revolutions, seizures and even simple ‘political actions’ on its list, as all of these factors matter for financial performance and investment returns. In fact, they seem to be more and more important, as investors search the world for returns to meet the high performance targets handed down to pension funds and sovereign funds by...you guessed it...politicians.
So now that we’ve decided that these people are of value to institutional investors, what exactly would these folks actually do? Here’s a few ideas:
And that’s just four areas where a geopolitical specialist could help senior policy makers. Given that so much of fund’s performance is a function of the asset allocation decisions of senior managers, I think these folks could add a lot of value. Watch this space...
