Kuwait's Pension Fund Posts Record First-Half Profit

Fiona MacDonald of Bloomberg reports that Kuwait’s $124 billion pension fund had record first-half profit:

Kuwait’s $124 billion pension fund racked up a record profit in the first half, continuing a turnaround for an institution previously marred by a corruption scandal.

The Public Institution for Social Security, which owns a quarter of U.S. private equity firm Stone Point Capital LLC, said profit rose 362% to $12.1 billion in the first half. It surged 611% to $4.7 billion in the second quarter, reflecting the “governance and strength” of its new investment strategy, according to a statement on Wednesday.

A new management team was brought into the fund in 2017 to transform the state-owned institution after its former head was found guilty of personally profiting from the organization over decades. The fund has since exited more than $20 billion in questionable deals in a major reorganization of its portfolio.

PIFSS, as the fund is known, said in August it aims to have 12% to 17% of its portfolio in real estate, followed by private equity at between 8% and 13% and infrastructure at 3% to 10%.

Between 40% and 60% of its portfolio is in stocks and fixed income. PIFSS also owns 25% of Oak Hill Advisors and 10% of TowerBrook Capital Partners LP.

Not much is known about Kuwait's Public Institution for Social Security. Back in August, Bloomberg reported that the massive pension fund had cash to spend after the overhaul: 

Kuwait's $112 billion Public Institution for Social Security plans to boost investments in private equity and infrastructure following an overhaul that left it sitting on too much cash.

A new management team was brought in during 2017 to transform the state-owned institution after a corruption scandal involving a previous manager. The fund has since exited more than $20 billion in questionable deals in a "major cleanup" of its portfolio, according to Raed Al-Nisf, deputy general manager for investments and operations.

"It's no longer a one-man show, and will never be again," he said in an interview. "In the past, it was a sleeping giant, and no one wanted to wake it."

The revamp is paying off. The Public Institution for Social Security, also known as PIFSS, had a record investment profit of $7.3 billion in the three months through June, an almost fourfold increase from a year earlier.

The fund aims to have 12% to 17% of its portfolio in real estate, followed by private equity at between 8% and 13%, and infrastructure at 3% to 10%, he said, without detailing current holdings.

"This is a moving target, but it's a range we're normally in," Mr. Nisf said. "We're long-term investors by definition, we don't have a need for cash on a yearly basis."

Cash accounts for about 11.5% of its investments, which the fund aims to cut to 4% over the next seven months, he said. At one stage the fund had a "catastrophic" 41% of cash available for investments, Mr. Nisf said, instead of being deployed into asset classes that could make higher returns.

PIFSS hired Cambridge Associates in 2016 to advise it on an asset-allocation strategy, and when completed in March 2021, the fund will start with U.S.-based consultancy Mercer.

Since 2017, the fund has implemented policies to improve disclosure, avoid conflicts of interest and introduced whistleblowing processes. It decentralized investment decision-making to a four-member committee.

Employee numbers in the investment division were increased to over 100 — more than that of the two biggest asset managers in the oil-rich country combined — while the unit was split into eight departments from three.

Former Finance Minister Anas Al-Saleh triggered the restructuring process, and two years later his successor, Nayef Al-Hajraf, placed Meshaal Al-Othman at the helm, appointing him director general after two years as chief investment officer.

Between 40% and 60% of the fund's portfolio is in stocks and fixed income. PIFSS is the second-largest investor in the local market after Kuwait Investment Authority, Kuwait City, the world's fourth-largest sovereign wealth fund with assets of $534 billion, according to the Sovereign Wealth Fund Institute. It has holdings in more than 40% of the stocks on the domestic exchange although most of its portfolio is offshore.

It has a different mandate to the sovereign wealth fund because it handles pensioners' savings, Mr. Nisf said.

"We aim to have the best stocks and best-performing managers, it's not a political role," he said. "We follow opportunity."

Well, I'm glad Kuwait's Public Institution for Social Security (PIFSS) got rid of its former head, cleaned up shop, bolstered whistleblower  policies and is focused on investments and delivering on its mandate.

Mr. Nisf is right, PIFSS is a pension fund and as such it has a different mandate than the giant Kuwait Investment Authority (KIA), the fourth-largest sovereign wealth fund which is very well known among institutional investors.

Sovereign wealth funds are similar to large global pensions except their mandate isn't to cover future pension liabilities, they literally make investments to bolster the public finances of the states they represent.

Now, as far as PIFSS's record first-half profit, I can only speculate it significantly cut its cash holdings further to bring it closer to 4% and bought more public and private equities at the right time.

When I read that at one point the Fund had 41% of cash to invest, I almost fell off my chair. 

Mr. Nisf was right to call this "catastrophic" as  no pension fund in the world holds more than 5% cash at any given time. These are long-term investors that need to be fully invested (or close to it) at all times.

Unfortunately, I went to PIFSS's website and cannot read Arabic so I cannot share more. I hope they add and English version similar to the Kuwait Investment Authority.

What do I think of PIFSS working with Cambridge Associates and Mercer? That is fine, they are well-known consulting shops but I think they need to gain more exposure and start doing more club deals with Canada's large pensions.

All in good time, I was happy to learn about Kuwait's large pension fund.

Kuwait itself is undergoing a leadership change. 

Last month, Sinem Cengiz, a Turkish political analyst who specializes in Turkey's relations with the Middle East, wrote an interesting article for Arab News on how Kuwait is starting a new era after smooth leadership transition:

There is a famous saying when it comes to Kuwait that indicates how leadership is an integral part of the country. It states: “Kuwait is Al-Sabah, and Al-Sabah is Kuwait.” In the past few days, all eyes were fixed on the oil-rich state following the death of its 91-year-old emir last week.

As expected, the country enjoyed a very smooth succession process, in which the new emir and crown prince took office one after the other. Kuwait’s new crown prince, Sheikh Meshal Al-Ahmad Al-Jaber Al-Sabah, took his oath of office before parliament on Thursday after being nominated by his half-brother, the new emir, Sheikh Nawaf Al-Ahmad Al-Sabah. The octogenarian crown prince was unanimously approved by the country’s National Assembly.

Not all members of the Al-Sabah family are closely involved in politics. Many have opted for careers in business, in government administration or in academic professions. Sheikh Meshal, with past experience in the Interior Ministry, has been the deputy chief of the Kuwait National Guard since 2004, largely staying out of the political scene.

One of the things being praised about the new crown prince is that, unlike other top candidates for this position, he has a clean profile in the country’s tumultuous politics, despite his career in the Interior Ministry. Sheikh Meshal, who accompanied the late emir to the US for the latter’s medical treatment, is also known for being very close with the new ruler. His appointment, rather than the selection of a next-generation candidate, has been interpreted by analysts as a “conservative choice” that provides much-needed continuity and stability. Thus, the selection of Sheikh Meshal, the fourth sibling to ascend from the same branch of the royal family, delays any generational change in Kuwait, for a decade at least.

Sheikh Nawaf nominated his successor as crown prince in a very short period of time — just eight days — breaking the record for the quickest nomination despite having a year to make his choice. Previous rulers took at least 20 days. This was not only due to the fact that Sheikh Meshal was the strongest candidate for the post, but also the fact that only a few weeks remain until parliamentary elections are due to take place. Sheikh Nawaf prolonged the term of the outgoing parliament until Oct. 20 to ensure it could approve the crown prince. Given the economic problems the country faces due to the coronavirus disease (COVID-19) pandemic and falling oil prices, the next parliament is likely to have more opposition members

The most important aspect of the previous elections, held in November 2016, was that the opposition made a strong comeback after an absence of more than three years, winning almost half of the seats in the 50-member parliament. The upcoming elections are expected to further strengthen the position of the opposition, although it is hard to say that Kuwait has a unified opposition. Its parliament is often an amalgam of several figures with diverse demands and motivations.

However, Kuwait’s parliament takes a unified stance when it comes to the country’s foreign policy. Therefore, much of the parliamentary dispute is related to domestic issues. The issues that will be on the new parliament’s agenda will range from the budget deficit to rising prices, from youth unemployment to austerity measures, from oil prices to public sector jobs, and, most importantly, the issues related to COVID-19.

Thus, the succession took place while the country faces some key issues. Sheikh Nawaf and Sheikh Meshal, both brothers of the late ruler, are expected to focus on domestic issues. Both have witnessed all the stages of Kuwaiti politics since the country’s independence in 1961. Given their years of service in the state apparatus, it is likely that the country will continue on the same foreign policy path, but it might go through significant changes in terms of domestic politics. Kuwait, with its solid institutions, has been through several critical phases in its history, while learning lessons from most of these phases. 

Sheikh Meshal, in his televised remarks, said Kuwait will uphold its regional and international commitments and “its path of peace and democratic approach.” Thus, it will be significant to see the new leadership’s policies and the outcome of the upcoming parliamentary elections, since these developments are likely to shape Kuwaiti politics for years to come. 

I wish Sheikh Nawaf and Sheikh Meshal the best of luck as they lead this oil rich kingdom into its next phase but I do hope they maintain governance and do not interfere in Kuwait's pension fund in any significant way except to ensure it remains in good hands and maintains its focus on its members' best interests.

Below, Meshal Alothman, director general at the Public Institution for Social Security, discusses his investment strategy for the fund and his asset allocation. He speaks on “Bloomberg Daybreak: Middle East.” (August 20202).

Mr. Alothman sounds like a very sharp pension fund manager. I invite him to read our series on integrated Total Fund Management (Part 1, Part 2 and Part 3 are already available and Part 4 will be published here tomorrow).

Lastly, earlier today, CNBC's "Halftime Report" team discussed their investment strategies amid election uncertainty as results continue to trickle in.