The Maharlika Investment Fund

The last day of May marked the enactment of the law creating the Maharlika Investment Fund.

No recent economic legislation has seen as quick an enactment period despite a lot of cautionary if not negative comment against the idea. Within half the year after the president’s proposal to create the fund, the legislative machinery responded to bring it to fruition.

Purpose of the Maharlika Fund. The Maharlika Investment Fund is a sovereign wealth fund. It is the country’s first such fund.

Sovereign wealth funds in many countries have been founded on many principles, such as: (1) to protect the country’s wealth and invest it for future use in case of economic crisis; (2) to shield the national economy and the state budget from undue risks arising from economic fluctuations; and (3) to help conserve inter-generational equity in the sharing of benefits from the exploitation of natural resources; and so on.

The Department of Finance, upon the final passage of the Maharlika Investment Fund said that it would “optimize national funds by generating returns to support the (government)’s economic goals as set in the Medium-Term Fiscal Framework (MTFF), the 8-point Socioeconomic Agenda, and the Philippine Development Plan (PDP) 2023-2028.”

The MIF can invest “in a wide range of assets, including foreign currencies, fixed-income instruments, domestic and foreign corporate bonds, joint ventures, mergers and acquisitions, real estate and high-impact infrastructure projects, and projects that contribute to the attainment of sustainable development.”

Thus, the MIF is allowed the flexibility to invest in a wide range of assets. It has the freedom to take on a degree of risk that will enable higher economic returns on the investments to be earned.

It is likely, however, that it will not invest directly in the undertaking of major infrastructure projects of the government that require large capital investments. Such projects are best financed from long term development loans backed up by tax money. That is the role of the development program, as pursued by the government, which undertakes the financing and construction of such projects.

What the investments of the MIF hopes to capture are the opportunities that arise once these development projects are completed. The private sector often appropriates most of such economies, so why not the MIF, too? By participating in the opportunities open to all when the external economies are realized, the MIF could earn larger yields in investments that can then be appropriated for national purposes.

In this way, the MIF is essentially a practice of state capitalism exercised for a public purpose – to generate more funds that could, in turn, be used to help the development process further. As the government puts it, the MIF will provide a long-term source of income that supports the future generations. It will also help to ease the budgetary burden of generating funds to support high priority programs of the government.

All the above, of course, rests on the successful accomplishment of its mission, a task yet to be proven. That could be achieved under competent management and due exercise of proper governance. (Of course, this is where some could say, Amen!)

Capitalization of the MIF. Many sovereign funds have been crafted out of the generous availability of “excess resources” to the state. Energy-exporting countries have accumulated huge export surpluses. A number of countries accumulate large trade surpluses because of successful development programs.

Such countries need to recycle their funds in part to protect themselves from internal instability. Sovereign wealth funds have been one solution to help solve their quandary.

The Philippine situation is different. It is operating in a highly constrained budgetary environment. Its development program requires a continuous effort of large development expenditures. The COVID-19 pandemic has worsened the budgetary tightness. In short, and for a long time to come, the country has to be on a sustainable debt finance framework of fiscal budgeting.

The main debate on the MIF was centered on where to get the capital on which to build its operations. The Senate settled that aspect, even though the solution still rests on controversial grounds, since all investible funds have their alternate uses aside from being grouped into a single managed fund.

The capital will come from contributions coming from the Land Bank and the Development Bank of the Philippines. Some capital contributions too from PagCOR, the state corporation that regulates gambling. The other main source of capital is to come from the profits of the Bangko Sentral for a limited period of two years.

The final bill now explicitly prohibits government agencies and corporations that provide for social security and public health insurance from contributing to and investing in the Fund. This prohibition practically include the principal social security pension systems (SSS, GSIS, PhilHealth, Pag-IBIG, OWWA, and PVAO). On the other hand, the bill allows the participation from the private sector.

Expect “rollercoaster” experience. By their nature, investment funds suffer from volatilities of some kind. From the looks of it, the MIF will be generally a conservative investment fund, primarily because of its public functions. Indeed, the government will want to have sound and stable management that produces good yields.

During the deliberation on the bill there have been discussions of model investing and model investors.

Two of the most successful investing institutions were the Norway sovereign fund(which is a pension fund) and Warren Buffet, who has made the Berkshire Hathaway the model of sound long-term investing with very good yields overall.

Yet, in the last year (2022), in the economic climate of inflation, war-time volatility (Ukraine War), and other economic turbulence, both funds suffered very losses.

The Norwegian Pension Fund lost $164 billion, which represented a loss of 14 percent on investment. It was a very large loss, but it was not fatal to the fund.

In the case of Warren Buffet’s Berkshire Hathaway, the losses in the same year was $22.8 billion. Again, such large losses, which smeared Buffet’s usual celebratory year of investing, was also large. But it has total asset of $948 billion.

If such things could happen to the most admired funds, then expect that investment life for the ordinary practitioner is like riding a roller coaster.

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