Saudi Wealth Fund Aims To Double AUM To $400 Billion By 2020 - Discovers Leverage Boosts Returns

Saudi Arabia’s sovereign wealth fund, a key engine of the kingdom’s plan to diversify the economy, on Wednesday laid out new targets for growth, saying it aims to nearly double the value of assets it manages to around $400 billion by 2020. That sum includes the expected proceeds from the planned initial public offering of up to 5% of state-owned oil giant Saudi Aramco. The listing, slated for next year, could raise as much as $100 billion, Saudi officials have said. The Saudi fund, called the Public Investment Fund or PIF, held assets worth roughly $224 billion as of September, it said in a document released on Wednesday. It had previously struggled to calculate the value of its holdings, estimating them to be between $200 billion and $300 billion. The PIF has made a series of high-profile investments and announcements since Saudi Arabia unveiled its long-term plan for economic overhaul last year. It has invested $3.5 billion in Uber Technologies Inc., and committed $45 billion to a technology fund led by SoftBank Group Corp.

The PIF’s announcement highlighted its aim of raising the fund’s annual returns.

“The Program also encompasses efforts to maximize value in PIF’s existing assets, which make up the majority of the Fund’s holdings, and a new target to increase PIF’s Total Shareholder Returns (TSR) up from 3 percent to between 4 to 5 percent.”

While our calculation suggests that they’ll need at least 5% to reach $400bn by 2020, Reuters reports that the PIF is even more optimistic about the “long-term”, aiming for 6.5-9.0% - all-time highs in equities and all-time lows in bond yields notwithstanding.

How will it do this?

As Reuters reported from the Future Investment Initiative in Riyadh, it will invest in almost every asset class (apart from gold and cryptos it seems) and – this might be important - add leverage to juice its performance.

“The 96-page program said PIF will structure its investments in six areas: Saudi equity holdings, sector development, real estate and infrastructure, mega projects, international strategic investments and a “diversified pool” across global asset classes….

 

Outside of Saudi Arabia, PIF’s investments will be in a number of assets such as fixed-income, public equity, private equity and debt, real estate, infrastructure and alternative investments such as hedge funds, the fund said…

 

It also outlined its four major sources of funding to include capital injections from the government, government asset transfers, loans and debt instruments as well as retained earnings from investments.

The PIF’s managing director, Yasir Al-Rumayyan, explained to Bloomberg how it discovered collateralized lending.

“If you look at investments we have today, it’s basically all equity -- we need to look at leverage,” Al-Rumayyan said at the event Tuesday.

 

“If we’re in one project, we can use the underlying project as the base for the leverage with no recourse to the rest of the portfolio.”

It"s not just about returns, however. The PIF’s press release estimated that its program will lead to the creation of nearly 300,000 new jobs.

The Public Investment Fund (PIF) Program (2018-2020) has today been launched as part of the Kingdom’s Vision 2030 Vision Realization Programs (VRP)…

 

The four key objectives underpinning the Program include growing and maximizing PIF assets; launching new sectors; localizing advanced technologies and knowledge; and building strategic economic partnerships…

 

The PIF Program, which is underpinned by 30 separate initiatives, will see the Fund’s AUM increase to SAR 1.5 trillion (over $400 billion) by 2020, creating 20,000 direct domestic jobs, more than half of which are high-skilled roles, and 256,000 construction jobs, which will increase PIF’s contribution to real GDP from 4.4 percent to 6.3 percent

For anyone who’s a tad skeptical about any of this, there were soothing words from “MBS” in the PIF’s press release. HRH Prince Mohammad bin Salman Al-Saud, said:

“The PIF Program represents a vital milestone as we work towards realizing Vision 2030. As well as being recognized for being well-capitalized, the Fund also wants to be known as being well-run, transparent and well-governed, and the PIF Program will ensure this ambition is delivered."

Study Of 10-Year State Pension Returns Highlight Full Extent Of Public Pension Ponzi

A new study of public pension returns by Cliffwater LLC has found that the median U.S. state pension plan returned just 5.9% annually over the 10 years ended June 30, 2016.  Meanwhile, as Pension and Investments notes, the top performing state pension, the $15.6 billion Oklahoma Teachers" Retirement System, was the only fund that managed to eek out a return over 7% during the same period.

U.S. state pension plans returned a median annualized 5.9% for the 10 years ended June 30, 2016, vs. 6.8% for the 10 years ended June 30, 2015, said Cliffwater"s most recent annual state pension performance report.

The average 5.7% return for the 10 years ended June 30, 2016, fell within a wide range of individual pension plan returns (3.7% to 7.1%).

Once again, the two top-performing state pension plans for the period were the $15.6 billion Oklahoma Teachers" Retirement System, returning 7.1%, and the South Dakota Investment Council returning 6.8% for the $10.5 billion South Dakota Retirement System. In third place was the $7 billion Missouri Local Government Employees Retirement System, returning 6.7%. All returns cited are annualized figures.

Of course, as we"ve noted on numerous occasions, the problem with those returns is that most public pensions in the U.S. have randomly decided to assume a long-term return of 7.5%, or 1.6% higher than what they"ve actually been able to achieve in practice. All of which only serves to mask the true scale of the pension crisis in the U.S. by discounting future liabilities at an artificially high rate.

As we noted in a post entitled "An Unsolvable Math Problem: Public Pensions Are Underfunded By As Much As $8 Trillion," lowering discount rates from just 7.5% to 6.0% could result in a 65% increase in underfunded liabilities.

But you don"t have to take our word for it, even Kentucky"s State Budget Director, John Chilton, admitted in a recent letter sent out to the Kentucky Employees’ Retirement System that if pensions were subjected to the same rules governing single-employer private plans that their underfunded level would double and federal law would have already required "that all benefits be frozen and the plans terminated."  Per The State Journal:

“It is well known that all of the Commonwealth’s pension plans are in a crisis. Using the same investment rates of return that corporate plans are required to use – the Corporate Bond Index rate – the aggregate underfunding for all of Kentucky’s eight plans goes from $33 billion to $64 billion,” he wrote in the letter.

“Furthermore, if Kentucky plans were subject to federal standards for single-employer private plans, six of the plans would be designated as having severe funding shortfalls because their funded status is less than 60 percent. As such, federal law would require that all benefits be frozen and the plans terminated. This is true even using the old 2016 actuarial assumptions, rather than the more realistic discount rates and other assumptions required of private plans.

“The need for significant reform is evident to anyone looking at the health of the Commonwealth’s plans within that larger context.”

The letter said total employer contributions for Fiscal Year 2017, which ended June 30, were $857,311,370.  If there is no legislative action, that rises to an estimated $872,677,346 in FY 2018, the current fiscal year, and $1,483,863,927 in FY 2019, an increase of over $611 million, from this fiscal year.

Adding insult to injury, Cliffwater found that well over 50% of public pension funds (adjusted for hedge fund allocations) are invested in public equities...

The alternative investment consultant"s report also looked at pension funds" asset allocations and performance by asset class.

As of June 30, 2016, the plans had an average asset allocation of 48% public equities (down two percentage points from 2015), 26% alternatives (up two percentage points), 24% fixed income (up one percentage point), and 2% cash (down one percentage point).

According to Cliffwater, most of the alternatives increase for the year was directed to private equity, private debt and opportunistic investments. Within alternatives, the average allocation as of June 30, 2016 was 36% private equity, 30% real estate, 18% hedge funds, 13% real asset and the remainder in other alternatives.

Looking at alternative performance, the median return for private equity was 9.9% for the 10 years ended June 30, and 5.8% for real estate. Individual pension funds" real estate returns varied the most of any asset class for the 10-year period, Cliffwater noted.

...All of which raises two very important questions: (1) how is it possible that pension underfundings continue to surge when 50% of assets have participated in one of the biggest equity bubbles in history and (2) when the current equity bubble bursts, which in inevitably will, will it result in a cascading failure of retirement systems across the country and finally expose the public pension ponzi for great lie that it has always been?