The World’s Largest Investment Fund Is About To Change Strategy
by Tom Dyson
September 26, 2006
SAFE is the largest investment fund you’ve never heard of. They work out of a non-descript office tower on Finance Street. They have no polished retail branches, catchy slogans or sales team. There is no selection of funds to choose from. They don’t even do business with the public – at least not directly.
All they have is a huge pile of money to invest... a pile that’s growing at $20 billion per month. In three weeks, this pile will reach one trillion dollars.
Here’s the rub: I have it from a very good source that SAFE is about to change its investment strategy. The implications are enormous. Investors who anticipate this change will make out handsomely.
Before we get to the opportunity, I’ve put together some stats so you can see exactly how much money we’re talking about here:
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Bridgewater Associates is the world’s largest hedge fund with $17.7 billion in assets. SAFE is over five hundred times the size of Bridgewater Associates. Absolute Return magazine estimates the hedge fund industry controls around $1 trillion. Therefore, you can say SAFE controls about the same amount of money as the entire hedge fund industry put together.
The exact composition of the fund is a secret, but due to its extraordinary size, analysts are able to calculate its holdings by studying global fund flows. One analyst quoted in the Financial Times estimates 70% of SAFE’s assets are invested in U.S. dollar denominated instruments...
“Mainly US Treasury bills but increasingly in instruments such as mortgage-backed securities and even emerging-market bonds,” he says.
Now we know why bond prices are so high... everywhere. SAFE’s firepower has skewed the market.
- SAFE’s money pushed U.S. government bonds to their highest levels since the 1960s in 2003, where they remain.
- SAFE’s money bid up emerging market bonds to the point where the emerging markets’ yield spread over Treasuries reached its lowest level in history this year... 1.74 points on May 3, 2006.
For the guys at SAFE, the extraordinary size and growth of the fund has become a ball and chain around their ankles. They’ve lost their agility. Most investments aren’t liquid enough for their consideration. That’s why they hold so many dollar bonds. This asset mix is a big problem... and as the managers at SAFE see it, a big risk. Which bring us to today’s opportunity...
From snippets I’ve picked up in the press, it looks like the management at SAFE is about to change strategy.
In case you haven’t guessed yet, Finance Street is in Beijing. SAFE stands for State Administration of Foreign Exchange. It is a department of the state-run People’s Bank of China. They manage China’s foreign exchange holdings.
Source: Financial Times
“The huge value of the reserves has bought to the surface an intense debate within China itself about how the country should manage, and even spend, the funds,” reports the Financial Times. “Two top leaders both discussed the reserves for the first time in public comments this month.”
Wen Jiabao is the prime minister.
“Mr. Wen said the increase had ‘improved China’s overall national strength and international payment capability’, though he also acknowledged the downside: the way in which the reserves flow back into the local financial system and feed the distorted structure of the economy.”
Zeng Qinghong is a vice-president.
“Mr. Zeng said China ‘ would take comprehensive measures to avoid further significant growth’ in the reserves.”
Zhou Xiaochuan is governor of the central bank.
“[Mr. Zhou] was even blunter in impromptu comments to reporters. Asked about the reserves, he replied: ‘We have enough.’”
China’s leaders are telling us that China is about to stop buying Treasury bonds. When the biggest buyer of an asset goes away, the usual outcome is a fall in the price of that asset. In this case, this would mean lower bond prices and higher interest rates in the U.S. for the foreseeable future.
