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The key challenges for Sovereign Wealth Funds (SWFs) relate to the interaction between three sets of issues:
Macroeconomic policies determine inflows and outflows for the SWF, and thus also the time horizon of the investments. The particular role of the SWF for macroeconomic policies may also have important implications for the appropriate levels of various kinds of risk for the SWF.

Investment strategy must build on a thorough understanding of financial markets and the relationship between various forms of risk and expected returns. But understanding financial markets is in itself not sufficient for setting the appropriate level of risk. Financial theory must be combined with an understanding of the role and objectives of the SWF and the risk tolerance of the ultimate owners to make meaningful recommendations on risk taking for an SWF.

A robust governance structure is needed to support the implementation of the chosen investment strategy. The governance structure must also address principal-agent problems inherent in delegated asset management. Good governance is also required to build legitimacy for macroeconomic policies which entail accumulation of substantial assets on government hands.

Asset Owners

For asset owners, there is value in setting mandates for managers which properly reflect the macroeconomic role of the fund and its capacity to bear risk. The mandate must also address principal-agent problems in delegated asset management. Skancke Consulting gives asset owners advice on a range of issues, including

  • how to set up a fund as part of an overall macroeconomic policy strategy
  • how to establish a robust investment strategy, taking account of the macroeconomic role of the fund
  • how to establish a good investment process, allowing the strategy to be revised in a structured and timely way
  • how to organize fund management in order to ensure a clear and proper division of roles and responsibilities between various governing bodies
  • how to set a mandate for the manager which ensures that the manager´s incentives are properly aligned with the owner´s interests

 

Asset Managers

For asset managers, there is value in better management of relations with the owner. A more robust governance structure with a clear division of responsibilities allows management to exploit the comparative advantages of the fund with less risk of being stopped out in periods of market stress. Skancke Consulting gives asset managers advice on a range of issues, including

  • how to establish a robust internal governance structure
  • how to establish and maintain a good working relationship with the owner
  • how to set a robust investment strategy within the mandate given by the owner
  • how to make sure that relevant risks are properly identified and communicated to the owner
  • how to build and protect wealth through active corporate governance strategies

Skancke Consulting gives advice on these and related issues based on long practical experience in macroeconomic policy setting, investment management and resolution of governance issues and as advisor to the very highest levels of governments and corporations.