Transparency

By Roger Nusbaum | September 03, 2008 | 3:38 PM | 0 Comments

A popular topic for the last few months has been Sovereign Wealth Funds. What are they doing? What is their motivation?

There have been calls for them to be more transparent and a lot of media coverage as they seem to be moving toward better transparency. This is an issue of sorts as there is visibility for many of the SWF, which are already quite large to get much bigger.

These are surplus countries and their surpluses are getting bigger compared to the US which is a deficit country whose deficit is getting larger.

Norway is often held out as being a model for transparency. You can look at what the Norway Government Pension Fund-Global owns by clicking here, scrolling down to number 13 and then clicking on the various PDFs.

If you look that the holdings it might seem like they own everything. While that may not be quite right they do own an awful lot of companies. 

As I was scanning the holdings I had a thought that might be useful to today's market and is a meme that has been written about in several places over the last few days. This is a period of time where most of the things we know and expect about portfolio construction and diversification are letting us down--nothing's working.

This happens from time to time.

The Norwegian SWF is certainly not immune from what has happened this summer. How nervous do you think the managers of the fund are? Are they afraid that Potash (POT) or Arch Coal (ACI) will go out of business and trying to decide whether to blow them out? Probably not.

We can learn from this. "But SWFs have infinite time horizons and I do not" you might say. Well whatever your situation your time horizon is certainly longer than this summer and chances are your time horizon is much longer than you think.

The way inflation has been working for the last ten or 20 years your costs will likely go up by 50% in the next 15 years. A 60 year old today could easily live another 30 years. That means his expenses from ages 85-90 will be close to double what they are now, if he is lucky. That makes the numerical case for a very long time horizon requiring growth.

Another wrinkle is that we do not know what medical innovation will do to life expectancies in the next couple of decades--all the more reason for long time horizons.

Potash may or may not be the right proxy for its space but if you thought it was the right proxy two months ago, it is very unlikely that anything has changed in the last two months.