The Qatar Investment Authority’s perfect storm

Qatar’s sovereign wealth fund — one of the world’s biggest — has taken a hit this quarter with a number of stakes reporting sub-par performances.
The Qatar Investment Authority’s perfect storm
By Ed Attwood
Fri 02 Oct 2015 03:56 PM

Whichever way you cut it, the third quarter wasn’t a classic one for the Qatar Investment Authority (QIA). In fact, it could hardly have been worse. A series of the sovereign wealth fund’s sizeable stakes performed well below par, headed by Volkswagen’s implosion over diesel emissions, and investor concerns about Glencore’s debt. From Shell to Barclays, and from Siemens to Agricultural Bank of China, the roll-call of paper losses has stacked up.

Making matters worse, CITIC Group — the Chinese conglomerate with which the QIA has plans to jointly invest $10bn into Asia — has been the subject of a damaging investigation by the Chinese government, which believes subsidiary CITIC Capital has been engaged in insider trading.

But there’s no need to reach for the violins just yet. The QIA’s mandate is “to create long-term value for the State and future generations” — its bankers do not view its investments on a quarterly basis. And while the paper loss seems significant, it is by no means the worst performance by a large sovereign wealth fund this year.

In August alone, for example, the Government Pension Fund of Norway — the world’s biggest — lost about 5 percent of its value as Asian markets, spooked by falls in China, hit the skids. That translates to around $40bn, which puts the QIA’s performance into some perspective. The bigger you are, the harder you fall when the markets turn against you.

Critics have hit out at the QIA’s stake in commodities trader Glencore, where it is the biggest shareholder. Their argument has been that for a country whose economy is itself based on commodities (natural gas and oil), stakes in the likes of Shell and Glencore don’t make sense when you are attempting to diversify state assets. It’s easy to be wise after the event, however. The Glencore stake is, amongst other things, a bet on the long-term performance of the Chinese economy. If CEO Ivan Glasenberg can convince shareholders that his plans to cut Glencore’s debt pile add up (and shares rose by 14 percent last Wednesday), then the QIA’s bet still looks strong.

As for Volkswagen, if you had questioned a month ago whether an investment in the world’s largest car manufacturer (and a German brand to boot) could be considered risky, you’d have been laughed out of town.

And while the paper losses may be considerable, we of course have no idea how the fund as a whole performed in the quarter. Let’s not forget that the fund’s huge investments in London property have clearly only been heading in one direction over the past few years.

The lack of transparency at the QIA is such that even estimates as to its size (probably somewhere between $200-300bn) amount to pure guesswork. That said, the need for further diversification remains clear. The confirmation last week that the QIA will be investing $35bn into the US over the next five years from a new office in New York is a step in the right direction. Reuters reported in June that the QIA would set asset allocation targets for the first time.

Lastly, the bankers in Doha can take some comfort from the fact that they are hardly alone.  The last quarter has been the worst for European and US equities since 2011. There’s no need to reach for the panic button just yet.

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