Do sovereign funds 'get it'?
Venture funding veteran Wayne Silby suggests that sovereign funds could play a key role in underpinning social and ecological development across the globe.
I was attending a cocktail reception for sovereign wealth fund managers at a World Bank conference about their collective debut on the world stage. I got worried; I felt I might be with a crew of MBA spreadsheet guys wanting to be ‘smart’. It was as if they were all going to get bigger and better fishing boats to fish the ocean to increase the catch. Well, as it is with our planet’s eco system, you can get fished out. Everybody loses when no one takes some responsibility for the ocean itself—or, as we have just witnessed, how the larger picture of financial flows among individual players can prove disastrous for the overall system.
The sovereign funds were not to blame for Wall Street’s meltdown, but they do have a role to play in the new world order. And what we need now is a ‘Best Practice’ for the SWFs. They should dedicate 2% of their assets to keeping our social and eco-systems vital, so that there are fish for all. We need to have some part of their brain power and resources dedicated to thoughts about enlarging the pool, not just fighting over a corner of it. This enormous pool of money needs to take some responsibility for the game itself, not just gauging itself by how nimble it can navigate the waters. We all know the story of how the credit relationship of a bank changes when it makes a small loan versus a mega loan. The SWFs are the new partners to the entire financial system. As the system goes, they go.
A couple years ago, I was at the Peoples Bank of China discussing micro finance. At the end of the meeting, I asked a vice-governor: “Why are you sending all this money to the USA so we can buy bigger and bigger homes ? Won’t sending your savings to America encourage flagrant spending and more and more debt? This could end badly.”
We must keep expanding our mindset to deal with the fast changing complexity of globalised finance. I graduated from Wharton in 1970 and later founded what is now Washington’s largest mutual fund group. I was ‘smart’ in those days because not much talent went into finance. Now everybody is finance savvy and investment management, including private equity and hedge funds, has become commoditised. This argues even more that our index-like, increasingly correlated returns depend on some focus on the health of the system itself. As I said, regrettably, to one impeccably dressed hedge fund manager at that cocktail party (after a couple of drinks): “So, how does it feel to be so talented and waste your energy on zero sum games?”
Am I suggesting SWFs should take lesser returns? Not exactly; but we need to optimise our returns by setting aside some money, 2% of assets, for what I call ‘High System Impact’ (HSI) investments - an allocation that will ensure decent returns on the remaining 98% of the portfolio. A prime example of HIS investing is micro finance –investments that give the poor an opportunity to be part of the system. Student loans, micro insurance, OPIC’s Africa funds, low income housing, innovation funds — are other examples that give the billion plus poor people on the planet the opportunity to envision a better world for their children, and thereby create the social stability that leads to risk reduction on overall returns. At Calvert, we set aside about 2% of our money for these purposes and target a modest 3% return on these monies. We lend a good part of this money to the poor for housing. And how have we fared in this housing credit crisis? We essentially have no problems. We lend to the poor to buy houses they can afford, instead of what a Wall Street salesman can flip.
This idea of 2% HSI investments as a Best Practice needs to be on the table. I am convinced that by setting aside 2% of SWF assets for these HSI investments, targeting a nominal return, we will all make more money in the end - or at least make as much money without the volatility.
What about the IFC, ADB, and other development banks? The unfortunate truth about these otherwise good institutions is that they must make market rate investments, because they need to fund through the capital markets. The HSI program would provide the critical concessionary money to give a hopeful vision for the next generation. I sit on enough investment committees and see a plethora of opportunities that can have an enormous social impact, but only yield nominal returns. Yet, our mindsets are still stuck in 20th century schooling about feeling dumb if we don’t get the good returns.
Some do get it: I was with the head of Google’s non-profit arm a few years ago and advised him a lot of good could be done with a social development fund, where the fund would just break even, or even lose a bit. He told me they were “already there”. The sponsor of the cocktail event, Larry Fink, CEO of Blackrock, made an impressive speech, displaying a high-minded view of what the world needs. At Harvard Business School, the most popular clubs among the students historically rotated from Investment Banking to Private Equity to Hedge Funds. Now the most popular club is the Social Enterprise Club. Before micro finance, investing was an overlooked tool in social development. Recently, the world recognised Mohammed Yunus, who was on our Calvert World Values Fund board, with the Nobel Peace prize. Many foundations are now beginning to look at their endowments and ask how some of those monies can be made part of their mission. And Norway has started to make such an effort with its SWF.
Through a Best Practice HSI program, a discussion of values and interconnection can too become part of SWF culture. By charging the new talent with a broader view and coupling this with a small amount of high impact financial resources, the world can begin to look to these new institutions with aspiration instead of trepidation.