For some SWFs, it ain't easy

Ewart Williams is governor of the Central Bank of Trinidad and Tobago and director of the Heritage and Stabilisation Fund, a $4 billion sovereign wealth fund that was set up to secure and invest the proceeds of the country’s oil wealth. Williams had been a director of the IMF before returning to his country to run both the central bank and the fund. He was also a founding member of the SWF Forum, the IMF-led body comprising the world’s sovereign wealth funds. He remains on that board.

What was the reason behind starting the Heritage and Stabilisation Fund and how has it developed since inception?
We had frittered away resources after the first two oil booms. When oil prices fell the economy went into a serious recession. When oil prices started to recover again, the government was committed to putting away resources. We started with an interim revenue stabilisation fund and then the Heritage and Stabilisation Fund was formally put into law in 2007.

You now have $4 billion under management. How are you investing that?
We have a strategic asset allocation with four asset classes. So we have 25% in short duration sovereign bonds; 40% is in longer duration core US fixed income; and then 17.5% in US core domestic equities and 17.5% in non-US equities.

Have you been increasing your allocation to emerging markets given the problems in the developed world?
Yes, but very slowly.

Does that include Asia?
I am sure that some of the fixed income is Asian, but it’s a small proportion.

How has your background of 30 years working at the IMF influenced you?
My career with the IMF made me painfully aware that, particularly with oil and gas as a wasting asset, it was important to put funds aside for future generations and make sure they are invested wisely.

A few years there were some concerns about what sovereign wealth funds were up to. You are also on the board of the Sovereign Wealth Fund Forum, the global grouping of SWFs. How is that body performing?
There is more information available now than there was before the body was set up. The rules of the game are much clearer than they were before. What prompted this was the fact that certain advanced economies became suspicious of the intentions of the sovereign wealth funds.

People were worried that they would undermine the stability of the national financial systems as they were dealing with such vast amount of resources. As it turned out, the sovereign wealth funds have in many cases helped the stability of the national financial systems as they have been used to bail out banks. When international funding and liquidity were scarce, sovereign wealth funds were able to come and provide financing.

The fact that the sovereign wealth funds have a long-term focus has meant that countries have become more and more convinced that the SWFS are not a threat to the international financial system but that they can improve it. Now sovereign wealth funds are much better accepted than they were prior to this group.

So that was the initial intention. What is on the agenda now? What are you discussing?
Now the next step is to formalise the group with a secretariat. That is something that will be considered. As of now the IMF acts as a sort of secretariat. The next step is also in ensuring compliance with the Santiago Principles.

Do most of your SWFs colleagues want to adhere to the Santiago principles or has there been push back?
Most want to adhere. But the fact is that you are dealing with different political systems where governance means different things. Governance in Trinidad and Tobago or in some European countries such as Norway is different from what it is in many of the Middle Eastern countries. Therefore one has to find common ground between different political systems and that’s not easy. And what the Santiago Principles have done is to find that minimum common ground. The challenge is getting compliance to those principles.

How are the SWFs changing their investments at the moment?
Most sovereign wealth funds would like to say that they have a long-term horizon and so they are not responsive to short-term volatilities in financial markets. In most cases their resource allocation strategies are decided long in advance and then these are then implemented. However, the larger sovereign wealth funds are very active [at the moment] because in an uncertain environment, opportunities arise and those funds that are very liquid are able to seize those opportunities.

So they are actively looking for bargains at the moment?
I am sure. Those sovereign wealth funds that have lots of money are looking for bargains. The smaller ones like ours have a long-term vision and we tend to stay faithful to our strategic asset allocation as long as we can.

Do you co-invest with any of the bigger SWFs such as CIC, GIC or Adia?
No we don’t. I know it is something that has been discussed. I am sure that consideration would be given to that kind of scheme [by others], if it hasn’t happened already.