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Azerbaijan Oil Fund to Invest in Equities for First Time to Boost Returns

Azerbaijan Oil Fund to Invest in Equities for First Time to Boost Returns

The State Oil Fund of Azerbaijan, with $20 billion of assets, plans to shed its fixed-income only strategy and start investing in equities to boost returns.

“As a long-term investor, being in fixed-income is not going to help so the fund will start moving to riskier asset classes as soon as possible,” Chief Investment Officer Israfil Mammadov, 37, said in an interview at his office in Baku, the nation’s capital. “Most likely we will start with the developed world and passive management, meaning indexes.”

The fund’s assets may grow to $100 billion by 2030 after Azerbaijan boosted oil production and prices rebounded from 2008 lows, the World Bank said in a December report. Azerbaijan, a Caspian Sea nation of 9 million people, pumped 50.4 million metric tons of oil last year, 13 percent more than in 2008, according to the state statistics committee.

Sofaz is seeking to boost returns as the nation’s oil fields become depleted. Oil production in Azerbaijan, an industry pioneer in the 19th century, will peak in five years, and reserves will run out in about 25 years without additional discoveries, according to a Sept. 9 research note from Royal Bank of Scotland Group Plc.

The fund expects return of about 2 percent on its holdings this year, because “we live in an extremely low-yield environment,” Mammadov said last week.

“This leads us to more risky asset classes, and we will start with equities,” he said. “The next step will be alternative investments, i.e. private equity and real estate.”

He declined to specify what percentage of assets would be invested in stocks, saying only that it will be “what’s tolerable for the country.”

The investments will probably be managed in house, Mammadov said. Sofaz has 30 people in its asset management team, including traders and fund managers.

Founded in 1999, Sofaz manages all state revenue from oil and natural gas. It is charged with preserving Azerbaijan’s economic stability, helping diversify the economy and preserving the nation’s wealth for future generations.

Before joining Sofaz, Mammadov was the U.K. representative for the State Oil Company of Azerbaijan and the senior diplomat for finance and energy security issues at the Azeri embassy in London. He holds a degree from the School of International Economics at the Moscow Institute of International Relations.

To get higher yields, the fund has increased holdings of investment-grade emerging market debt, Mammadov said.

“We are also trying to find the extra yield we can get by buying lower credit quality, but not less than what is allowed,” he said.

Government regulations require Sofaz’s fixed-income holdings to be rated no lower than BBB- at Standard & Poor’s or Baa3 at Moody’s Investors Service, their lowest investment grades. Sofaz is required to invest 50 percent of the fund in dollar-denominated assets, 40 percent in euro assets and 5 percent in those denominated in British pounds.

Sofaz bought the debt of U.S. mortgage lenders Fannie Mae and Freddie Mac, as well as investment banks, as spreads widened amid investor concern about the subprime crisis and the collapse of Lehman Brothers Holdings Inc. in 2008, Mammadov said. The fund says it has about $595 million in U.S. agency debt and $90 million in Treasuries.

It also owns Greek, Spanish and Portuguese debt as those countries struggle to cut their budget deficits and rebuild investor confidence, Mammadov said.

“We do not have plans to sell those positions,” he said. “We think they will manage to overcome these problems.”

Source: Bloomberg
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