National Fund reports threefold growth in management costs

Head of Kursiv Research

Last year, expenditures associated with the management of the National Fund of Kazakhstan and its audit were three times bigger than in 2022, due to fees and bonuses to external managers for excess returns.

Photo by Askar Akhmetullin

On January 18, 2024, Kursiv covered the results of the National Fund of Kazakhstan in 2023 and the past 24 years. At the time, the editorial staff noticed that costs associated with fund management and its annual audits rose from $48.8 million in 2022 to $155.4 million in 2023.

The editorial staff decided to appeal for comments to the National Bank of Kazakhstan which manages the sovereign fund on behalf of the government of the Republic of Kazakhstan.

«Management expenses include an asset management fee and performance fee, payments for custodian services, services for annual external audit and informational services,» Batur Vakhidov, deputy head of the Monetary Operations Department of the National Bank of Kazakhstan, responded to Kursiv’s inquiry.

In 2023, the surge in costs was driven by an increase in payments to external managers who were hired by the fund to diversify its investments in different asset classes, countries and management styles, the National Bank said:

«This happened because foreign tax agencies have fully restored their scope of work after the COVID-19 pandemic in 2020-2020, as they once again require presentation of documents proving the tax residence of managers.»

According to the National Bank, invoices from external managers for services rendered in the past few years (2021-2022) accounted for a significant part of these costs and amounted to $99.9 million.

«About 80% of this money are performance fees that should be paid to external managers when they outperform the broad market,» the regulator said.

According to the Ministry of Finance, the National Fund reported $3.9 billion in returns last year after $1.7 billion in losses in 2022 and $3.7 billion in returns in 2021.

In 2015, the fund reported $22.6 billion in investment profitability, a historical high for the institution. This incredible growth was driven by the revaluation of assets mainly nominated in foreign currency. At the time, the National Fund costs associated with asset management were at $26.6 million.

The average rate of costs for asset management and audit of the fund in 2018-2022 was $39.9 million. The average rate of return on investments for the same period was $37.7 billion.

According to the Finance Ministry’s report on the National Fund income and costs in 2022, excess returns of a stabilizing part of the fund’s portfolio were negative (-0.18% and +0.01% in 2021). Only two asset classes «sovereign bonds in mature markets» (+0.50% to the benchmark performance) and «global equity» (+2.45%) out of six reported excess returns. In 2021, only the global equity class outperformed the overall market (+1.50%).

On top of that, the work of Kazakhstan’s National Fund is less transparent compared to its peers in Norway and Azerbaijan.

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