Risk appetite

When the controversial Maharlika Investment Fund was proposed and debated in Congress, the point was made that Filipino taxpayers do not have extra funds to potentially lose in a sovereign investment fund. But the BBM administration was insistent. They presented the fund as a way of expanding the financial resources of the government given the tight fiscal space inherited from the Duterte administration.

The impression was made that Maharlika will invest on more or less sure things and that it will be able to deliver profits in its early years. Of course, that’s far from the nature of a serious investment fund. Risks will have to be taken and the bigger the risk, the bigger the potential rewards or potential losses. Since Maharlika will be funded by government financial institutions, there was a strong negative outcry from a risk-averse public.

To soften the criticism on Maharlika’s potential risk taking, the BBM administration was forced to take out GSIS and SSS from the list of GFIs mandated to contribute to it. Government and private sector retirees have a very low threshold in accepting risks to their pension funds.

Little do they know that the one running GSIS for BBM takes pride in his reputation as a “rainmaker,” a term in the financial community for money managers able to generate investments for big projects. It goes without saying that he is a big risk taker which should be fine if he was heading a private equity firm. But the head of a government pension fund is expected to be more conservative.

According to Bilyonaryo, some of the investment decisions and proposals of the GSIS head have met stiff scrutiny at the board level. One example is the P1.4 billion worth of preferred shares of Alternergy Holdings that GSIS bought via a private placement. It is about half of the P3-billion equity capital raised by former Energy secretary Vince Perez for his new company. The GSIS GM unilaterally decided to invest because anything under P1.5 billion need not have the board’s approval. Same with the P1.46-billion stake in Nickel Asia.

But the board took issue with the investment decision anyway because it broke the pension fund’s Investment Policy Guidelines which limits its stock investments to companies with a minimum market capitalization of P15 billion. Alternergy only had a market value of P3.029 billion when GSIS made the private placement.

Bilyonaryo reports that Alternergy’s market cap is currently down to P2.83 billion as the stock tanked by 22 percent to 72 centavos since GSIS’ entry. Alternergy is also one of the worst-performing IPOs as it has plummeted 43 percent from its offer price of P1.28. The company needs to raise some P16 billion to finance its Tanay and Alabat wind projects.

That the Alternergy investment almost immediately fell is to be expected. It involves pioneering energy technology, in this case wind, and it entails long term risks. Indeed, because energy is one of Maharlika’s investment pillars, this is the kind of project Maharlika, not GSIS, should be looking at.

That’s not as bad as a supposed proposal to bail out a Duterte crony from a bad investment in an ambitious property development project.

But even the GM’s management team, according to Bilyonaryo, hesitated to assume the debt accumulated from BDO Unibank, Bank of China and Philippine National Bank. There will be a public outcry if GSIS becomes this crony’s savior.

Then there is the plan to invest $100 million in a high-risk investment fund. But the GM himself ditched the plan, according to Bilyonaryo, after intensive questioning by the board. An internal memorandum supposedly pointed out that the proposal carries substantial risks, as the fund is designed for sophisticated investors with the financial capacity and risk tolerance to handle high-risk ventures. Fund investors should be prepared for prolonged risks without guaranteed capital returns, liquidity assurance and the potential for complete loss of investment.

The pension fund of government employees has been abused in the past. It was used to buy paintings at one point. The first Marcos regime used it to buy Manila Hotel and PAL both of which translated to losses for the fund.

After EDSA, politics also intruded in the investment decisions of the government managed pension funds. This resulted in the overpriced investment in Equitable-PCIB shares of stocks for which SSS lost P8 billion, according to a paper published in the Philippine Management Review by a UP professor of accounting.

Hopefully there will be better public scrutiny of investments that will be made by Maharlika. Private sector investment managers cannot use private sector risk appetite assumptions in handling government funds. Transparency is expected.

Recall how Singapore’s Temasek Holdings had to publicly apologize after it became known that it lost $275 million in the now-bankrupt FTX cryptocurrency exchange.

“Although there was no misconduct by the investment team in reaching their investment recommendation, the investment team and senior management, who are ultimately responsible for investment decisions made, took collective accountability and had their compensation reduced,” Temasek chairman Lim Boon Heng said in a statement posted on Temasek’s website.

CNBC reports that Deputy Prime Minister and Finance Minister Lawrence Wong commented: “What happened with FTX therefore has not only caused financial loss to Temasek but also reputational damage.”

“Temasek recognizes this and has issued a comprehensive statement to explain its due diligence process and the circumstances leading to its investment in FTX,” he said, adding that an internal review is being conducted to study what went wrong with the FTX deal and how to improve the process.

Class act by the Singaporeans. That’s how to keep public trust.

Back here, the GSIS Board of Trustees should be commended for doing its job. Most GFI boards routinely bless management decisions with little or no questions. Hopefully the SSS board will be as vigilant.

 

 

Boo Chanco’s email address is bchanco@gmail.com. Follow him on X @boochancoa.

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