Page 72 - Aamir Rehman Gulf Capital and Islamic Finance The Rise of the New Global Players

56 PART I Background and Context

five- or ten-year “life,” within which it must make investments, real-
ize gains, and return capital to shareholders. In the event of a major
downturn (like the current recession), funds with predefined exit
timelines often find themselves in a squeeze. National trusts, in con-
trast, can often ride out the storm and stay in positions that are likely
to increase in value in the long term, even if they temporarily incur
losses. This flexibility can give national trusts greater resilience in
their portfolios over time.
Whereas investment funds typically must have a defined strat-
egy that is stated to committing investors up front, national trusts
again have greater flexibility. They may pursue multiple strategies
that evolve over time, adapting to market conditions and to the needs
of the nation. An investment fund that is defined as an equity fund
cannot, for example, transform its portfolio to fixed income, even if
fixed income offers stronger returns. National trusts have flexibility to
do so. As Gulf populations grow and age, governments’ liquidity
requirements will grow, and national trusts can adjust their invest-
ment strategies accordingly. The Qatar Investment Authority (QIA)
may, for example, migrate to more conservative investments 30 years
from now if the state requires steady income from it.
Ownership is another key difference between national trusts and
investment funds. Since national trusts have a single owner (the
state), they are extremely sensitive to public needs and are not
swayed by general market sentiment. Investment funds, in contrast,
need constant communication and interaction with the diverse set of
investors that provide their capital. It is inevitable that the needs and
preferences of shareholders will influence (for better or for worse) the
investment strategy of a fund.
Another stark contrast between national trusts and funds is that
the beneficiaries of a national trust are the general public and (in fact)
future generations not yet born. These stakeholders cannot yet invest
for themselves, so the institutions do so on their behalf. The provider
of capital (the state) and those making decisions regarding allocation
are not investing their own personal wealth; they are acting as
trustees for a nation. Again, this raises the sense of stewardship and
responsibility as well as fostering a long-term perspective. In this
sense, national trusts are therefore more similar to the US Social
Security Administration or a university endowment than they are to a
typical investment fund. In fact, the analogy with endowments is apt
for another key reason: ideally, national trusts wish to meet national
needs through their returns without dipping into the principal