Our investment heatmap - hot on China and the US
By Tim Weber
Business editor, BBC News website, in Davos
Stockmarkets are wobbly again. Global economic prospects are uncertain. So where would big money managers invest?
Davos - where the world's rich and powerful meet for an annual get together - has the answers.
Every year the World Economic Forum conducts a little experiment. Top hedge, investment and pension fund managers (and a few others, this year including me) gather in a small room and are randomly divided into groups. Each team gets a task: Devise a high-performing investment portfolio for a certain type of investor.
Under Davos rules I can't disclose the names of participants. Suffice to say that some of the biggest brands in the investment and banking world were represented in the room.
Where would you put your $1bn?
This is not an exercise in due diligence. We had just over half an hour to come up with a portfolio for a $1 billion investment, and 10 minutes to pen a prospectus - the sales pitch to potential investors.
Quite quickly it got very competitive - although not ultra-realistic.
We pinned $50m and $100m dollar bills on a world map to show where our money would go. My joke that our team leader was distributing the cash as if handing out bonuses didn't go down all too well.
And not every investment strategy would find regulatory approval.
"If [UK financial watchdog] the FSA saw this portfolio, they'd hang me in a corner of the room," said a fund manager whose company runs one of the largest investment funds in the UK.
Still, the workshop provided a great insight into which regions and assets are "hot" - what the Davos organisers call "the investment heatmap".
Our tasks were to invest for a:
- pension fund
- sovereign wealth fund
- infrastructure fund
- multi-family office
- hedge fund
- private equity fund, and a
- real estate investment trust.
My group was tasked to spend $1bn on expanding a pension fund. Pension funds have a tricky game to play: They can't gamble with pensioners' money, but need to deliver inflation-beating returns.
We decided to play it relatively safe by allocating 65% of our money in developed markets, and 35% in emerging markets - going very heavy on China, but hedging our currency exposure around the world.
Our team also invested a lot in Australia (mainly commodities), banking on a safe legal and political environment while betting on continued strong demand from China.
We invested little in Western Europe, and nothing in Central and Eastern Europe. South Asia, however, received a healthy chunk of our money.
SOVEREIGN WEALTH FUND
Sovereign wealth funds are very unusual investment vehicles. They are owned by whole countries, usually to tuck away big income from commodities - either for a rainy day or when the oil runs out.
This team decided to play Norway. To balance the country's trading pattern, it stayed away from oil and the Norwegian kroner's euro exposure. It's 10-year assumption predicted a long and slow recovery in developed economies, and rapidly growing emerging markets.
The money went mainly into energy investments (outside the Middle East and its oil), shares in growth markets, and government debt in "distressed" markets like Greece - where government bonds are cheap to buy and unlikely to fail.
The team was big on China, but very underweight on Japan and South Korea.
Energy, transport, water etc... much of the world urgently needs investment in infrastructure. The drawback: these are usually long-term big investments, and you would not want to see them fail.
This team decided to put its full £1bn into India, because of its "chronic supply gap and high capital need".
In contrast China already invests heavily in infrastructure.
The money would go into water, transport, power and waste management on both greenfield and brownfield sites, in close collaboration with local partners and governments. To ensure execution, it would embed its own operations teams in the projects.
The team promised to agree "puts" with the respective governments to safeguard against any sudden changes that might be enacted, such as in energy tariffs - effectively an insurance policy against the deal going sour.
This idea however triggered hollow laughter from investors who actually work in the infrastructure sector; "they'd never get that," one whispered to me.
Very rich families have specialist wealth managers to look after their money.
This team said it would see wealth preservation as its top priority "rather than going to the casino".
It had a bias towards high quality shares.
Geographically it went for diversity, with 40% of the money going to North America, 20% to Western Europe, and 30% to Brazil, India and China (but nothing to Russia), with the rest spread around.
Japan would get no money because of debt issues and demographics.
The one you've been waiting for.
This team clearly had seen too many hedge funds going out of business, and offered that the partners would match the invested money out of their own pockets, locked in over three years (we are talking $1bn here). Not only that, they also promised a fairly modest fee structure.
About 30% of the money would go into US mortgages and high-tech firms, while shorting US 10-year treasury bonds - in other words, betting their value would decline.
This was the only team putting serious money into Russia - long on Lukoil, short on Gazprom.
And like everybody else, they "believed" in China (especially consumer focused businesses) and India (infrastructure). They were "cautious" on Europe and "short" (i.e. betting on a decline) on the UK economy, roubles and the yen.
This team claimed not to have a "legacy portfolio" of troubling old investments to add its new $1bn to, and promised a total return strategy that would happily do without diversification.
They would look for "dislocated" troubled markets where it was easy to exit - like the United States (30% of the money). For similar reasons about 25% of the money would go to Europe (hoping for stability in the West and growth in the East), just 5% to Japan, while the remaining 40% would go into emerging economies (China 15%, India 15%, Russia 5%, Latin America 5%).
Real Estate Investment Trust
Real estate has been in the doghouse in recent years, with both commercial and residential property values sharply down. So could there be a better time to invest?
The team promised a broad geographical spread and low-risk investments, but going heavily overweight in emerging markets (50%), with 20% going to the US, 15% to the EU and another 15% to Australia.
Despite the crisis, North America is still the best place to invest, our teams thought - not so much because it delivers good returns, but because it is stable and relatively easy to turn investments back into cash. Europe, in contrast, was clearly on the sidelines, and Russia seemed to be on a blacklist.
Predictably, the big winners were China and India.
The Real Estate Investment Trust team got the most votes for its portfolio and was the winner of the evening.
Another team blew its chances when it promised to recruit "Nobel prize winners for economics" to help them do their research (it appears that amongst fund managers "economist" is a dirty word. If you now worry about your own money, don't despair. The team's leader, one of the doyens of the world of investing, told me later that they had added the Nobel prize winners for a laugh.
A word of warning, though.
Last year's winner of the investment workshop - held at the height of the crisis - decided to put all their money into cash. They would have missed out on the dramatic rise of stockmarkets over the past year.
It would have been better to stick with the runner-up of 2009 - who wanted to put their money into commodities.
So who was this year's runner-up? The private equity team. Not a bad place to earn you money either.