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Azerbaijan’s Sovereign Wealth Fund Changes Approach, Keeps Poetry

Sifting through annual reports from Sovereign Wealth Funds often throws up more than just innovative approaches to investing.

I read a lot of annual reports for pensions, sovereign funds, and institutional investors of many sorts. It may not be glamorous work, but I have to admit that sifting through hundreds of pages of reporting on pensions is actually worth my while.

Over the years, I’ve learned that almost every single Giant in the world is doing something – even if it’s just one thing – that is utterly unique. And that means that every fund has something to teach us; all that is required on my part is the time to figure out what the one thing is that a fund is doing differently and then focus in on it so I can better understand why it’s doing it.

Is the unique behavior of a pension fund simply a legacy of past decisions, regulations or policies? Or is there some real brilliance happening?

Anyway, all this is to say that I spend a lot of time reading and analyzing annual reports. But of all the annual reports I read, one fund's reports have jumped out at me each of the past three years: The State Oil Fund of Azerbaijan. Why? Because it has probably 15 to 20 pages of poetry.

Yes, actual poetry.

Starting in 2010, the State Oil Fund of Azerbaijan began using its annual report as a way to raise the profile of some of Azerbaijan’s poets. The practice stuck in 2011 and, I can now confirm, the 2012 annual report is continuing the tradition. Honestly, SOFAZ is on to something here; it makes for a fun read.

Anyway, I suspect the reason SOFAZ originally went this route was because its investment portfolio was relatively banal – almost entirely invested in fixed income assets – and so the poetry was a nice way to break things up.

But things have been changing. While the fund’s fixed income portfolio still represents more than 90 percent of the fund’s assets under management, there are now some aspects of the investment portfolio that are quite interesting. Here’s some examples of what I’m talking about:

- In 2012, the fund did its first direct property deals with investments in Moscow and Paris.

- The SWF has been buying huge amounts of gold bullion, with 2.5 percent of the fund’s assets literally invested in physical bars of gold.

- The SWF has been working with the IFC to back companies in emerging markets that are developing innovative ways to address climate change.

And there's some other bold stuff in there too. In fact, I'd say that if the fund continues with this kind of creativity, its portfolio may one day become more compelling than its poetry. And that day is coming very soon.

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