Alphabets

Gas, Government and Institutional Investors

The ruling by India's Supreme Court on Friday, ended the five-year long dispute between two rival firms owned by the Ambani brothers. The verdict may have caused far greater pain for the loser than gain for the winner.

The loser: Reliance Natural Resources (RNRL), a shell company that would have made big profits in the future, only if the SC had ruled in its favor. RNRL's stock crashed 23% on Friday and dropped another 9.5% on Monday morning.

The winner: RIL, India's largest company by Mcap.

 

Now, this is not our story. We will look at the bets placed by the so-called smart investors, or the institutional funds, on the climax of this high-profile case. India's domestic institutional investors - including the state-owned insurance behemoth Life Insurance Corp, the largest equity investor in Mumbai's markets - was steadily trimming exposure to RNRL since June 2009. As you can see in the chart below, some gullible foreign funds were gobbling the stock during the same period. 

RNRL stock ownership - last four quarters: DII - Domestic Institutional Investors, FII: Foreign Institutional Investors. source: Bombay Stock Exchange

This is where the DIIs re-allocated the capital. Gail is India's state-run monopoly in natural gas distribution.

Here is the past 1-year performance of Gail. Smart play!

And this is another stock that the DIIs accumulated in the past year, while FIIs continued to dump.

 

RNRL had locked horns with two Goliaths: India's government and its largest private corporation. In the second-half of 2009, Reliance ADAG, RNRL's parent, launched an aggressive campaign against India's Union Ministry of Petroleum and Natural Gas for allegedly joining hands with Reliance Industries for the benefit of state-run National Thermal Power Corp (NTPC). The campaign, advertised on all "mainstream" national newspapers, was the first of its kind in the country. It became an instant controversy and prompted both RIL and the government to react. 

The intensely dramatic, five-year long dispute finally ended without any surprise. But yes, some cowboy fund managers still lost money.

ADIA Chief Missing

The managing director of the Abu Dhabi Investment Authority, the world's largest sovereign wealth fund by assets, has gone missing.

From Bloomberg: The search for Abu Dhabi Investment Authority Managing Director was continuing after a glider he was in crashed into a lake in Morocco, the official Emirates News Agency said. “The nature of the terrain is making the survey and tracking effort especially challenging,” the state-run news service said yesterday. The pilot of the sailplane was rescued and is in stable condition, the news service said. The glider went down near Morocco’s capital Rabat March 26, according to the official Moroccan MAP news agency.

Over to Voltaire.net -- Sheikh Ahmed bin Zayed Al Nahyane, the younger brother of the president of the United Arab Emirates. He was in a glider which came down in a lake near Rabat (Morocco). Only the pilot was recovered alive.

BusinessWeek had interviewed the Sheikh for an earlier feature on ADIA, after its multi-billion dollar investment in Citigroup.

Photo: Business Week

SWF Trend Monitor

Global SWF assets grew 9% in 2009 to $3.51 trillion, according to a study published last week by Preqin. Sovereign funds from high-growth Asia and the resource-rich MENA region accounted for 75% of aggregate assets managed by SWFs. European funds managed 20%.

Norway’s Government Pension Fund which now manages about $445 billion recorded 25% returns, while Russia's fund wilted the most. The Russian Reserve Fund halved to around $60 billion.

Some 80% of all SWFs have exposure to equities, while about 55% have invested in alternatives. The source of wealth for 60% of SWFs is hydrocarbon revenues, while about 8% traces roots to other commodities.

On Thursday, the FT reported that India's oil companies are urging New Delhi to join the SWF bandwagon, though the country's dynamics are far from a Abu Dhabi or a Norway. Setting up one would help India secure off-shore energy resources and compete with China, whose state-backed commodities firms and SWFs often act in concert.

 

 

source: Preqin

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SWFs by assets

ADIA, which parted veil this week, is the world's biggest SWF, followed by the Norwegian fund, Saudi's SAMA and China's two big arms - SAFE and CIC.

source: SWF Institute

ADIA Parts Burqa

Abu Dhabi Investment Authority, the bloated petrodollar SWF, has followed its peers to incorporate transparency, complying with the IMF guidelines or GAPP, popularly known as Santiago Principles. According to the disclosures, about 10% of its estimated $425 billion assets are parked in alternatives including hedge funds and other managed funds. Some 45% of its assets are invested in developed markets. 

About 80% of ADIA’s assets are managed by external asset managers in active and passive mandates and as much as 60% of the portfolio is in indexed products, says RGE Monitor. Its strategic asset allocation --  remains heavily weighted to equities – and the fund is still largely invested in developed markets in North America, Europe and Asia, but as befits one of the earliest sovereign investors in emerging markets, its exposure to EMs is relatively high, ranging from 15-25%, most of that apparently in equities (the EM equity allocation ranges from 10-20%.)  Its neutral benchmark also includes 10-20% in government bonds, 5-10% in each of credit, alternatives and real estate, 2-8% in Private equity and 1-5% in infrastructure (its newest asset class). Cash has a strategic allocation of 0-10%.

Abu Dhabi along with the China and Norway, forms the respected and much feared holy trinity among sovereign funds. The SWFs of these nations manage combined assets worth some $1.5 trillion. Two funds from China, SAFE and CIC together manage some $650 billion. Norway's The Government Pension Fund manages $445 billion in assets. China's CIC had publicly disclosed its strategy and holdings early February, to comply with the SEC's mandatory disclosure norms for funds.

ADIA Vehicles

source: SWF Institute

DE Shaw Re-Initiates Dialogue on Leverage

Leverage, the mechanism to do more with less, has to factor quality, argues the eleven-page Market Insights this month from the $23 billion hedge funds firm DE Shaw & Co.

Investment managers, investors and regulators are often not on the same page in measuring leverage, according to the world's eighth biggest hedge funds manager. It highlights six factors to estimate the quality of a portfolio's leverage.

1. Term: Matching longer duration assets, especially illiquid ones, with longer-term liabilities.

2. Haircut: If lower, reduces counterparty risk and frees capital to be productively deployed elsewhere.

3. Haircut stability: Constant as against 'variables'. Provisions, such as VaR, are analogous to rating triggers. Example - AIG in 2008.

4. Counterparty's stability: A partner less likely to default, violate contract terms or act aggressively in times of stress. More willing to work with borrowers on new investment initiatives.

5. Valuation: A fair mechanism of pricing the financed asset, and including provisions for margin dispute resolution such as third-party arbitration.

6. Cost: Less than the expected return enhancement.

The principles of managing assets also apply to managing a portfolio of liabilities. Most notably -

a. Diversification: In terms of counterparties, assets and financing structure.

b. Term structuring: A longer or 'termed out' financing is costlier than the short-term option. This, however, could be viewed as an insurance premium against protection from cataclysmic losses if a crisis occurs.

c. Stress testing: By running various forms of liquidation scenarios.

The report suggests factoring the derivative exposure -- not accounted on the balance sheet as per US GAAP -- when calculating leverage. On the other side, derivative-adjusted leverage does not necessarily indicate the amount of financing. In the case of pair trade or interest-rate swaps, the notional value and nominal leverage are higher than the actual risk involved.

The conclusion: though it may increase the complexity of the discussions, both managers and investors stand to benefit from comprehensive dialogues on the quality of leverage.

Kicking the can down the road

The American Workers, State and Business Relief Act of 2010, passed by the Senate, could result larger funding pains and higher pension risk in the long-term. It may boost equity valuations of the S&P 500 firms in the near-term, as the temporary liquidity risk mitigates. 

From David Zion of Credit Suisse:

The proposed bill could reduce 2011 pension contributions for the S&P 500 companies by up to $13 billion or 23% and provide 42 companies with "savings" greater than 5% of trailing cash flow.

"Savings"

The Senate proposal sounds like a pick-a-pay mortgage. It would allow companies to defer required contributions to their U.S. pension plan by choosing to either pay interest only for two years and then pay off the underfunding over seven years or use a 15 year amortization period.

Details of the bill from P&I:

Current law requires plans to amortize their investment losses over seven years. A key provision will require employers that extend their amortization periods to make additional contributions to their pension funds if they pay employees in excess of $1 million a year, pay out extraordinary dividends to shareholders or redeem in excess of 10% of the market capitalization of their stock.

Under a compromise amendment accepted by the Senate on March 9, plan sponsors that opt for the extended nine-year amortization period would be obliged to make the additional plan funding contributions for only three years. Employers that opt for the extended 15-year amortization would be obliged to make the additional payments for five years.

 

PFs embrace equities

Global pension fund assets rebounded in 2009 -- gaining 15% to $23 trillion -- after dropping to $20 trillion in 2008, according to a study by professional services provider Towers Watson. PF assets were down 21% worldwide, in 2008.

Pension fund assets in the thirteen biggest markets total $23 trillion or about 70% of their combined GDP and some 85% of the world's PF assets. The largest markets -- US, Japan and the UK, saw a decline in the share of their PF assets in the past decade. US and Japan, together owns 70% of total PF assets.

           PF Assets Growth: 1999-2009

This huge growth - about $7 trillion in a decade - was led by two major factors: the sharp rise in PF's exposure to equities and the strong performance in global stock markets. In 2008, PF allocation to equities in the seven largest pensions markets was 48%. This increased to 54.4% in 2009. 

US, the UK and Australia remains the largest allocations to risky assets. Pension funds in UK decreased their equity exposure significantly from 77% to 60% over the decade. US pension funds marginally reduced their exposure, from 64% in 1999 to 61% in 2009.

Netherlands, Switzerland and Japan were among the most conservative in their PF investment strategies. The average allocation to bonds in the seven largest markets stood at 26.9% in 2009. Allocation to bonds saw a sharp rise between 2005 and 2008 from 24.5% to above 32%, before the sharp drop in 2009.

The PF investments in alternative assets continued to grow, reaching 17.4% in 2009.

Sachin unites South Asia

Sachin Tendulkar slammed a double-hundred for the first time in the history of one-day cricket, against a formidable South Africa on February 24. As the Time magazine said -- "For the 1.5 billion people who follow cricket — making it, by some reckoning, the world's second most popular sport after soccer — it was a moment to match Roger Bannister's 4-min. mile in 1954."

Global media was generous in praising the genius batsman -- clearly superior to Donald Bradman -- and by some standards, greater than any other sportstar. Even then, the post on Sachin breaking Saeed's record by Pakistan's Dawn, the second largest newspaper in that country, is highly impressive. The previous record was held by Pakistan's Saeed Anwar. "Watching Tendulkar break Anwar’s record was surreal. It was also heartbreaking at times. But most of all, it was fantastic!"

The comments from Dawn's readers, both Indian and Pakistani, shows a warmth and unity of spirit, rarely enjoyed in public debate by the people from both sides of the sub-continent.

Schehzad Shah, (Pak) -- "Sachin is a legend and I am proud that he is from the sub continent and not Aussie." 

Mainik Chakrabarty, (India) -- "Sports and culture can bring us together. I hope it does. By the way, I am one of many Indians who feel we should have invited Pakistani players in the IPL. What happened was a mess."

Abdul Batada (Pak) -- "Well done Sachin. Great acheivement. I am happy that Saeed’s record broken by an Indian not and Australian or South African. Congrats to Indian nation and to Sachin."

Ajay Singh (India) -- "Fantabulous Dawn! Sachin is the jewel from Subcontinent."

Indeed, Sachin is South Asia's ultimate antidepressant!! :)

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Excerpts of a profile from Time's archives, floating on blogosphere: 

"When Sachin Tendulkar traveled to Pakistan to face one of the finest bowling attacks ever assembled in cricket, Michael Schumacher was yet to race a F1 car, Lance Armstrong had never been to the Tour de France, Diego Maradona was still the captain of a world champion Argentina team, Pete Sampras had never won a Grand Slam.

When Tendulkar embarked on a glorious career taming Imran and company, Roger Federer was a name unheard of; Lionel Messi was in his nappies, Usain Bolt was an unknown kid in the Jamaican backwaters. The Berlin Wall was still intact, USSR was one big, big country, Dr Manmohan Singh was yet to "open" the Nehruvian economy.

It seems while Time was having his toll on every individual on the face of this planet, he excused one man. Time stands frozen in front of Sachin Tendulkar. We have had champions, we have had legends, but we have never had another Sachin Tendulkar and we never will."

Sino-Russian finance

A date for Asian diaries:

Event: Russia – Capital Raising and Investment Summit – Hong Kong

When: April 12 – 14
Where: The Four Seasons, HK

Keynote Speaker: Ronald Joseph Arculli, chairman of Hong Kong Exchanges and Clearing Ltd.

Goal: To attract a broad array of Asian financial market participants already active in, or interested in Russian financing and investments.

Apparently the forum will examine:

* The link that Hong Kong will play between Russia and China

* Capital markets opportunities: equity and debt
* Opportunities in Russian Distressed and Troubled Assets
* Exit strategies and liquidity in Russian investments
* M&A – outbound and inbound opportunities

Now, the big Russian/Hong Kong news recently was aluminum group Rusal’s big ticket IPO on the Hong Kong  bourse last month, where it raised $2.2 bn.

Russian oligarch Oleg Deripaska, who controls Rusal, is considering listing his electric power company En+ Power in Hong Kong too, in an effort to raise up to $1bn.

Putin and Deripaska -- Russian ‘Nexus’ of Organized Crime

That is despite the fact that Rusal shares fell sharply on their debut late last month. The stock has remained persistently weak, trading at HK$8.47 on Friday ahead of the Chinese new year holiday, against a flotation price of HK$10.80.

Maybe the intention with En+Power is to try and price the issue more accurately. Either that or find another group of investors happy to take 20 per cent haircuts.

With London now very much out in the cold as far as Russian IPOs are concerned, the appeal of Hong Kong would appear to be simple: access to Chinese capital.  Two Russian miners, Metelloinvest and SUEK, are also expected to sell shares in Hong Kong later this year.

This budding relationship in Sino-Russian capital markets, staged in Hong Kong, is interesting given recent claims by former US treasury secretary Hank Paulson that Russia proposed to China they both dump Fannie Mae and Freddie Mac bonds in 2008 to help foment the financial crisis.

Financial cold war anyone?

Read the full story here: FT Alphaville: Sino-Russian finance

Russia's Cleansing Act

Moscow has finally decided to curb crimes by its officials. Or so it wants the international media and the business community to believe.

On Monday, a police officer was convicted of extorting $350,000 from a key witness in the murder trial of legendary investigative journalist Anna Politkovskaya. On the same day, however, Swedish furniture giant Ikea, a loud campaigner against the Russian government's corruption, dismissed two regional directors for receiving bribes.

www.ilhn.com Anna Politkovskaya

On February 11, Russia adopted the amendments to its Criminal Procedural Code, originally proposed by President Dmitry Medvedev in December 2008, restricting pre-trial detention for economic crimes. The draconian Code was widely abused by its corrupt police force, to loot.

Russia has the worst business climate - a survey by PricewaterhouseCoopers Llp in November 2009, found - 70% of the companies operating in Russia had directly experienced extortion from officials.

The most high-profile victim, of course, was the powerful activist hedge fund Hermitage Capital Management, which manages the largest Russia-dedicated assets portfolio. In 2008, the hedge fund alleged facing theft and fraud involving Russia's Interior Ministry -- an issue prominently covered by the Anglo-Saxon press. Despite this, Sergei Magnitsky, a Hermitage lawyer, died in the cold - in November 2009, at a Moscow jail.