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Ashby Monk, Ph.D., executive director of the Global Projects Center at Stanford University and a senior research associate at the University of Oxford, has been blogging about sovereign and pension funds since 2008. 

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Fascinating Roundtable in Cape Town

March 05, 2012 at 3:00 AM EST

The Institutional Investor Africa Sovereign Funds Roundtable in Cape Town is now over, and I’m happy to report that it was indeed worth the 26 hours of flight time – no joke – it took me to get home (via Johannesburg, 2; New York, 16.5; and Los Angeles, 6.5; to San Francisco, 1). The topics ranged from the challenges facing African countries looking to establish new SWFs to the opportunities and practicalities of investing in Africa. I left with a stack of notes so high that neither a staple nor a paper clip could contain the sheer volume of wisdom I felt obliged to write down (I resorted to one of those binder clip things). Anyway, all credit to Stephen Glover and the II team for putting on a truly enjoyable event. With over thirty African institutional investors (and plenty more non-African funds) in the room, we really got a unique sense for how these investors differ in their thinking from their Western peers.

For example, most of the African funds seemed to reject the idea of using a Norway-style model for a sovereign fund simply because the (Norwegian) notion of investing all the country’s wealth abroad was anathema. The African investors were acutely aware that their countries remain capital starved and those local funds could spur local development by investing, well, locally. Some individuals went so far as to say that African funds should be willing to give up some returns in order to drive development objectives. As one individual said, “We need to rethink the business of investing; Africa is different.”

The Western investors in the room were a bit less enthusiastic about this approach; viewing it as a ‘have-your-cake-and-eat-it-too’ situation. As one CIO warned, it’s hard enough to make financial returns; if you add social returns into the mix you may wind up achieving neither. This individual suggested that the correct thing to do would be to maximize financial returns with a view to generating as much capital as possible; the surplus of which could then be returned to the politicians to spend on social projects. So the western advice here was clear: Leave the social stuff to the politicians; use the pension or sovereign fund to increase the pool of capital you have; the more you inject politics into finance, the more you dilute financial performance.

At first glance, it would seem the two positions are irreconcilable. But are they really? Maybe the mix of altitude, caffeine, and incessant white noise has me thinking crazy thoughts, but I think there may be a way to do it. Consider the likes of AP6 in Sweden or Mubadala in Abu Dhabi or Temasek in Singapore; all have tried to integrate commercial and development objectives in creative ways. We can also draw inspiration from the Emerging Manager Programs at US public pension funds or the home bias on display in Latin America; sponsors everywhere are in fact trying – some more successfully than others – to bring some limited extra-financial objectives into harmony with financial objectives.

Back to Africa: All seemed to agree that pensions and sovereigns should not be used as political tools or be politicized in their investment decisions. And that’s a great start, because it offers a small window of opportunity to design a governance model and investment strategy that could, in theory at least, marry commercial objectives with some limited set of development objectives. Here’s what I have in mind: The sponsor of the fund could dictate some well-defined (!) socially beneficial constraints that could then be operationalized and implemented by a fund on a purely commercial basis. In other words, you provide a sophisticated and autonomous team with a mandate to invest (for profit) in industries and areas where the most development impact can be had, such as infrastructure, agriculture, or private equity. You don’t leave the fund with discretion as to deciding what the social objectives of the fund are; you keep the fund focused entirely on commercial stuff (by assessing performance and compensating staff based on financial returns) but you set social and developmental constraints that guide their behavior.

Perhaps that’s the happy medium that would work in the African context? It’s got the mission clarity and profit focus at the level of the management that I think investment professionals require to do their jobs well, but it’s also got some development objectives at the level of the government. Mmmm. This cake that I have also tastes good...

Comment
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It seems to me that you are suggesting a sort of positive listing approach.
Instead of excluding from the SWF's investment scope some companies (like the Norwegian GPFG Ethical Guidelines do), you are suggesting establishing what are the (pro-development) sectors in which the Fund's investments should be made.
I'd appreciate your comments on this sort of Guidelines
Thanks,
Anna

Jan 02 2014 at 11:29 AM EST

Anna Viterbo
 

Hello Ashby! Thanks for sharing that ideas from African institutional investors. Truly, it seems that the Mubadala model could fit fine between the two extremes.
It's also good to hear from you that they are commited to avoid political intervention in SWFs decisions...whenever it is possible I should say...
bye and thanks again,
Javier

Mar 23 2012 at 8:07 PM EST

Javier Capapé