The cost of administering the Maharlika Investments Fund (MIF), the Philippines’ sovereign wealth fund to be established should the bill seeking its creation be passed into law, is alarming many Filipinos. Its ability to generate the “consistent and stable investment returns” that its proponents tout is also raising loud questions.
One wonders how the Fund will achieve consistent returns amid rising interest rates and inflation, tanking stock markets and looming global recession—features of the boom-and-bust cycle of the capitalist system.
For its initial operations, it will receive up to P25 billion, or more than six times the 2023 budget of the Department of Human Settlements and Urban Development, which faces a housing backlog for a third of the country’s population.
The P25 billion does not include the numerous tax exemptions to be granted the Fund—a seeming subsidy that Juan de la Cruz and practically all Philippine companies do not enjoy.
The assets and transactions of the Fund and the corporation that will manage it are to be exempt from all forms of direct or indirect taxes, including output and input value-added taxes, documentary stamp taxes, assessments, fees, charges, and customs or import duties.
The authors of House Bill No. 6398—led by Speaker Martin Romualdez and Senior Deputy Majority Leader Sandro Marcos, President Ferdinand Marcos Jr.’s first cousin and son, respectively—justify the creation of the Fund, saying it will promote economic growth and social development in line with the administration’s agenda of prosperity to reduce poverty incidence to single digit; meet the 6.5-8.0-percent real GDP growth target in 2023-2028; and help the Philippines achieve an upper-income status.
These are lofty goals on a global stage where yesterday’s market darlings are today’s former high-flyers, where making money is not assured, and where sovereign wealth funds can and do lose money.
Quick approval, objections
On Dec. 1, or just three days after HB 6398 was filed, the House committee on banks and financial intermediaries approved it—a quick response to the urgent appeal of its authors for “immediate approval.”
The bill and its approval at the committee level did not sit well with workers, pensioners, managers, and business and civil society groups. They warned that, among other things, what has come to be known as the “Maharlika Wealth Fund” or MWF could dissipate the pension funds of retirees, violate the independence of the central bank, and promote cronyism. (See concerns against the Fund at the end of the article.)
Their fears are not totally unfounded. Of the initial funding of P250 billion, P125 billion is to come from the Government Insurance System (GSIS) and P50 billion from the Social Security System (SSS)—pension funds for workers in the public and private sectors, respectively. The rest, P50 billion and P25 billion, will come from Land Bank of the Philippines and Development Bank of the Philippines, respectively—both government financial institutions.
Subsequent funding is to come from the following:
- Bangko Sentral ng Pilipinas in the form of foreign currency equivalent to 10% of the remittances of overseas Filipino workers and 10% of the annual contribution of the business processing outsourcing sector
- Philippine Amusement and Gaming Corp. (10% of its gaming proceeds)
- National budget
GOCC as fund manager
Administering the Fund will not come cheap as HB 6398 calls for the creation of Maharlika Investments Corp. (Maharlika Corp.), a government-owned and -controlled corporation (GOCC).
For its initial operations, Maharlika Corp. will get up to 10% of the Fund’s initial capitalization of P250 billion.
Maharlika Corp.’s initial funding for administrative and operational expenses is not a pittance. It could build some 50,000 housing units for poor families, many of which are living precariously along waterways in makeshift homes.
For 2022 alone, the country faces a housing backlog of 6.5 million units that could grow to 10 million at the end of President Marcos Jr. ‘s term in 2028, unless more funds are plowed into building houses.
Compensation for employees and officers, exempt from the Salary Standardization Law, may partly explain the big budget accorded Maharlika Corp. The exemption will likely make them among the highest paid “civil servants” in the country.
Despite the Freedom of Information Order, the public may never know the pay scales of Maharlika Corp. personnel because records can be accessed only upon approval by the board or by express provision of the law.
The employees and officers of Maharlika Corp. are also exempt from civil service laws, which provide for the merit system as the basis for employment in the government and guarantee the right of civil servants to self-organization and collective negotiations. (But with their huge compensation, they may not think of organizing themselves into a union at all.)
The exemptions granted Maharlika Corp. and its employees and officers do not end there. It is not covered by the Government Procurement Reform Act that mandates competitive bidding for state projects, and by the Philippine Competition Act that aims to prevent market concentration.
Subsequent funding for administrative and operating expenses of Maharlika Corp. is set at 10% of the gross revenue of the immediately preceding year.
These expenses are in effect the cost to be incurred by Maharlika Corp. in investing the Fund in assets such as:
- Cash, foreign currencies, metals, and other tradable commodities
- Fixed income instruments issued by sovereigns, quasi-sovereigns and supranationals
- Domestic and foreign corporate bonds
- Listed or unlisted equities, whether common, preferred, or hybrids
- Financial derivatives
- Islamic investments, such as “sukuk” bonds
- Joint ventures or co-investments
- Mutual and exchange-traded funds
- Commercial real estate and infrastructure projects
- Other investments as may be approved by the board.
Maharlika Corp. can also invest in real estate, infrastructure and other development projects, whether alone or in partnership with other companies. But the projects must be approved by the National Economic and Development Authority.
Managed, index funds
With powers to invest in a broad range of assets, Maharlika Corp. can even tap external fund managers for investments in equity and other markets.
“Third party fees and all charges incurred in connection with the establishment and management of the MIF, such as, but not limited to, custody fees, transaction fees, clearing fees, and management fees payable to external fund managers, shall be charged against the MIF,’’ states Section 14 of HB 6398.
In short, the Fund will be an actively managed facility that has relatively high administrative and operational costs.
It has been shown that actively managed funds, including those handled by external fund managers that charge brokerage commissions, generally do not outperform the market.
Neither do they fare better than index funds, which offer fees of less than 0.2%, or much lower than the active fund’s fees of more than 1%, thus saving millions of investors billions of dollars that would otherwise have gone to fund managers.
As Burton G. Malkiel writes in his now classic book, “A Random Walk Down Wall Street,” a blindfolded chimp throwing darts at the stocks page is as good as a stockbroker—a clear dig at fund managers.
Malkiel asserts that no market strategy can consistently outperform buying and holding a wide, randomly selected portfolio for long-term gain—a nod to index funds.
Index funds are spread across the entire market, mimicking a benchmark, say, the S&P 500, reducing risks and volatility compared with holding a few individual stocks. Some are unmanaged mutual funds while others are exchange-traded funds that can be bought and sold like any stock.
It is not for nothing that Warren Buffet, the “Sage of Omaha,” advised aspiring investors at Berkshire Hathaway’s annual meetings to just buy an index fund.
Putting his money where his mouth is, Buffet placed a bet that an index fund would beat a group of hedge fund managers chosen by a Wall Street investment firm.
“During the 10-year bet, the 200-plus hedge fund managers that were involved almost certainly made tens of thousands of buy-and-sell decisions. Most of those managers undoubtedly thought hard about their decisions, each of which they believed would prove advantageous. In the process of investing, they studied 10-Ks [a company’s annual report], interviewed managements, read trade journals and conferred with Wall Street analysts,” Buffet wrote in an annual letter to shareholders.
He won the bet. The index fund gained over the decade a 126-percent return, more than triple the 36 % that the hedge fund made.
Proponents of HB 6398 may be overpromising that the Fund would generate “consistent and stable investment returns.”
A sovereign wealth fund does not always end up ahead of the game. In fact, the Public Investment Fund (PIF) and Mubadala, the sovereign wealth funds of Saudi Arabia and Abu Dhabi, respectively, are among the main losers of Masayoshi Son’s Vision Fund gambles on tech venture capital.
In fiscal year 2021-22, the SoftBank Group reported a record annual loss of Y2.64 trillion ($20.5 billion) in its Vision Fund unit, according to Global SWF, a group that promotes a better understanding of sovereign wealth and pension funds.
The value of SoftBank Group’s portfolio companies, including public holdings like Coupang, Uber and Didi Global, were hammered amid a selloff in tech stocks.
PIF invested $45 billion in Vision Fund I. Mubadala placed $15 billion into the fund, which invests in emerging technologies and has also invested in disruptive startups in real estate, retail and transportation.
Norway’s sovereign wealth fund, the world’s largest, also took a hit. It posted a record loss of $174 billion in the first half of 2022 as stocks and bonds were hit by global recession fears and inflation.
The $1.3-trillion fund’s return on investment was a negative 14.4 percent in the first half of the year, the largest decline in a semester in its 26-year history, according to Reuters.
Temasek Holdings, Singapore’s sovereign wealth fund, was not spared. Temasek reported that it lost its $275-million investment in FTX when the cryptocurrency exchange declared bankruptcy in November.
United in resistance
The proposal to create the Maharlika Wealth Fund, even as the Philippines sinks deeper into debt and many Filipinos can hardly make ends meet, has united disparate groups and sectors into resisting it.
Opposition to the Fund may yet gather momentum and spread to other issues, unless their concerns are quickly addressed.
In fact, faced with snowballing opposition to the Fund, House leaders have backpedaled and agreed to remove the SSS and GSIS as sources of funds for it.
Marikina Rep. Stella A. Quimbo, a coauthor of HB 6398 and vice chair of the House committee on appropriations, announced on Dec. 7 that the committee would meet on Dec. 9 to amend the bill. But the planned amendment addresses just one of the many issues raised against the proposed Maharlika Wealth Fund.
Here are the concerns raised against the proposed Fund:
* Pension funds of the Social Security System (SSS) and Government Service Insurance System (GSIS) are personal contributions of workers in the private and public sectors. Their use for Maharlika Wealth Fund (MWF) is unconstitutional. Contributions to the SSS and GSIS are not public funds. The government merely holds the pension funds in trust.
* Tapping dollar reserves of the Bangko Sentral ng Pilipinas (BSP) is an assault on its constitutional mandate as an independent body tasked with promoting price stability and managing exchange rate volatilities. Contributions to the MWF could undermine the Philippines’ gross international reserves and BSP supervision of banks.
* The sovereign wealth funds of other countries were set up to manage surpluses – either from resources like petroleum for the benefit of future generations or from trade and state-owned enterprises. The Philippines has neither commodity-based surpluses nor surpluses from external trade and state-owned enterprises.
* Requiring Land Bank of the Philippines (Landbank) and Development Bank of the Philippines (DBP) to fund the MWF on the ground that they invest in government securities is in no way a creation of wealth.
* Landbank and DBP have no business in investing in the MWF, as the former is supposed to support the agriculture sector, and the latter the commercial and industrial sectors.
* Exempting the Fund manager, Maharlika Investments Corp., from the Civil Service Act, Salary Standardization Law (SSL), Government Procurement Act, Competition Law and Governance Commission for GOCCs Act signals a return to less transparency and to centralized economic decision making.
* Exemption from these laws, which are aimed at protecting public interest, will enable the MWF to be used to support big business allies and cronies, or worse, create conditions for corruption with impunity.
* Exempting MWF personnel from the SSL will allow them excessive leeway in giving themselves honoraria, allowances, per diem and bonuses.
* Oligarchic supporters of the administration can gain access to the Fund, which is allowed to invest in domestic corporate bonds, listed or unlisted equities, joint ventures and co-investments, and commercial real estate and infrastructure projects.
* Records of the Fund are not accessible to the public. These can be accessed only upon approval of the board or by express provision of the law.
* The MWF will duplicate the functions of government financial institutions without assurance of doing a better job.
* Government has a dismal recording in managing public funds. Examples include the Coconut Investment Fund, Road Fund and PhilHealth.
* The MWF will not attract foreign investors. Money managers will not invest in a vehicle that just replicates what they do.
* The Fund will be guaranteed by the Philippine government and any claim on the guarantee will ultimately be shouldered by taxpayers.
* With President Marcos Jr. as chair, challenging the governance of the MWF would be tough. * Ill-gotten wealth stashed abroad could be invested through the Fund and brought back to the country. Compiled by Juan V. Sarmiento Jr.