Advice to Saudi Aramco’s CIO

Saudi Arabia is about to confront a serious challenge: Where and how to invest the money in a gigantic new sovereign wealth fund created as part of an effort to diversify its economy and pivot away from its dependence on oil.

That is going to put a lot of pressure on whoever becomes the chief investment officer for the country’s Public Investment Fund, which may end up with responsibility for as much as $2 trillion.

Before the Saudis start putting that enormous pile of money to work, they may want to take a moment to consider a few items related to costs and performance of the new fund. Given the size of that portfolio, likely to be the world’s largest, a few basis points lost here or there may not seem like something to be too concerned about. But those small crumbs might add up over time to many billions of dollars. That could pay for a lot of services for the citizens of Saudi Arabia, who haven’t seemed especially happy with the economic performance of their nation, its repressive culture and closed political system. How effectively this fund is handled might figure in whether the Saudi royal family survives, or if it gets eased out by more aggressive modernizers or succumbs to the forces of the most brutal religious fundamentalists .

It behooves the fund managers to think long and hard about how to handle this. Allow me to suggest a few topics for consideration:

Costs: All of the academic data overwhelmingly demonstrates that costs are the single biggest drag on returns. They are also the item over which investors have the greatest control. It is tempting to ignore them. That would be a huge mistake. It is precisely why watching costs very closely from the very beginning is so important. It is all too easy to lose sight of spending due to the sheer size of the portfolio. Look at how Vanguard Group manages its own operations for a good example of what to do.

 Advantages and disadvantages:



Continues at: How to Manage $2 Trillion If You’re New at It



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