Welcome to the weekend, my friends. I think we all deserve a nice break, don’t we? Here are some of the top stories from the past few weeks for your reading enjoyment:
- The American Dream: There’s a reason we just experienced a political revolution in this country: the American Dream has become just that... a dream. Not Real. Here’s how I think we can change that and put our capitalist system on the right track.
- Fair & Balanced: According to a recent report from a for-profit asset manager, pension funds should not invest in infrastructure. It’s a long report, so I’ll be happy to translate their key argument: “Pensions should not invest in infrastructure because our fee model won’t work for an asset class of with this duration and payback period... so obviously you should only do things that help us make money!” Some of the words might be translated wrong but that’s directionally what they’re saying.
- Good Governance: The Chairman of the International Forum of Sovereign Wealth Funds told his membership this week that their risk and governance game is not great; that they have to improve their operations. Ted Truman of the Peterson Institute, who just released his latest edition of his SWF transparency rankings, seems to agree.
- Wall of Money: I know you’re probably sick of hearing about walls, but this one, I promise, pays for itself. How? It’s made of actual money. An onslaught of new data suggests that a wall of money is about to hit the world of private equity. Even those organizations that are already heavily committed to PE, such as endowments and foundation, are saying they will add even more to their books in the years ahead. And there’s some good reasons for this, as many people see public markets as being incapable of hitting their return expectations and private markets as critical to their success. OMERS, for example, says it can beat public market benchmarks by 300bps simply by focusing on private markets. That’s just another brick in the wall. So, if you have any chance of not being swindled by popular GPs, you’re going to have to do something innovative -- where the supply and demand characteristics are somewhat fair to the LPs. You can get some ideas here.
- Insourcing: The high cost of external asset management is driving a growing number of asset owners to insource, and, this week, we saw why. When done well, pension funds with in-house programs beat those with outsourced programs. Look at this crazy anecdote: Denmark’s Danica pension fund reported that it just made 15% from its direct investment book... in the first 9 months of the year. When you read stories like these, is it any wonder that both Alaska and CalSTRS announced that they will be ramping their internal teams? Some pension funds have taken the direct investment trend so far that they’re now evolving into the very managers they sought to cut out of the investment chain! That hurts my brain...Anyway, here’s a paper I did back in 2012 that should help anybody thinking about insourcing; including pointing out all the pitfalls and challenges
- Boom Times: We just got word this week that America’s pension liabilities are booming! Hooray! Wait, what’s that? Hold on... I’m being told that’s a very bad kind of thing to boom. Never mind.
- The Collaborative Model: Is your fund too big to able to credibly run the Endowment Model? Is your board allergic to high compensation packages, which prevents you from credibly pursuing the Canadian model? Are you convinced the public markets won’t deliver the performance you need to meet your returns, which means no Norwegian Model either? Well, perhaps the new ‘Collaborative Model’ of institutional investment is the shoe that fits. Learn more here:
- The Robot Invasion: Dear Investment Advisors: I admit that I was wrong when I said you’ll all soon be replaced by robots. That’s incorrect and I apologize for saying so. Turns out It’ll be a chatbot that takes your job and terminates your career. OK bye.
- Hippy Alpha: Giants around the world seem to be realizing that there is alpha in an environmental tilt. New Zealand’s Super Fund has always been a global leader on climate change, and the news about its new climate resilient portfolio new climate resilient portfolio just reconfirms it. In addition, the world’s biggest institutional investor - Japan’s GPIF - has set up a new ESG division, ESG division while some Dutch Giants are teaming up to figure out how to benchmark sustainability Some serious players getting serious about environment.
- Infrastructure Recycling: Where are we going to get the funds to pay for all the new infrastructure we desperately need, you ask? Great question. Well, in a neat-o new paper, by me and colleagues, we suggest that asset recycling by governments can be an important tool in any government’s arsenal. Enjoy!
- Overseas Expansion: After closing its London office, the Abu Dhabi Investment Authority is setting up an office in Hong Kong. Here’s a paper from a few years back that explains why.
- Locals Only: Sovereign funds the world over are turning their attention to domestic markets. The Oman Investment Fund is trying to catalyze a local venture capital ecosystem via a new fund. New Mexico continues to use its sovereign fund to catalyze a local venture capital market. Saudi Arabia has announced plans to build a “silicon desert” with its massive sovereign fund. In a low return environment, it’s not that bad of an idea to look locally for deals for which you have a proprietary and privileged connection. The key is in getting the governance right so you don’t end up funding “bridges to nowhere”.
Selfies: Despite the fact that legal weed has not actually hit the streets here in California, I still managed to write an article linking Theo and Vincent Van Gogh with the financing of climate solutions. It’s deep. Enjoy. In addition, I wrote blog post over at Long Game on why I’m taking on the State Lotteries. Punchline: It’s because they lie and target the most vulnerable in our society!
Finally, I wrote an article for Harvard Business Review that talks about how startups could fundamentally change the way investors operate. Check it out.
