Learning on the Job

East Timor's politicians can't agree on how to handle its oil and gas wealth. So Venancio Alves Maria puts the cash into T bills. Smart move.

VENANCIO Alves Maria is embarrassed by his modest office behind East Timor's ramshackle Banco Central building in the capital, Dili. It's a tiny prefabricated room next to the car park, and it has rickety air-conditioning and an Internet connection that's more worldwide wait than World Wide Web. Alves Maria shares the space with four colleagues and whatever chickens and goats stray into the central bank compound. "It's just a small dealing room," the 38-year-old fund manager apologizes. "It's not the Citibank dealing room!"

That's true, but Alves Maria can boast something that the disgraced masters of the Citiigroup universe in New York and London cannot: He's making good money.

Alves Maria is the executive director of the Petroleum Fund of Timor-Leste, and much of the future of one of the world's newest, tiniest and poorest nations depends on how that fund performs.

The four-year-old fund is worth $4.5 billion, and it's adding $150 million to $200 million a month. Its secret: The country's novice politicians are so absorbed by endless power struggles that they can't agree on how to invest the royalties rolling in from oil and gas deposits under the Timor Sea, between East Timor's southern coast and northern Australia.

But as it's turned out, the best option has been the default option. Absent any guidance from the politicians, Alves Maria and his colleagues buy only U.S. Treasury bills. That's the most conservative of positions, but as far more experienced investors lose trillions in financial markets around the world, sticking to boring bonds has been the best strategy for East Timor. The fund has been one of the most successful sovereign wealth fund over the last year simply because it hasn't lost any money. With its quarterly returns of 3% to 5%, Alves Maria and his colleagues look like financial geniuses. The Peterson Institute for International Economics, a Washington, D.C. research group, last year ranked the East Timor fund as the world's third-best-managed sovereign fund, after New Zealand's and Norway's.

"Aren't we clever?" jokes fund adviser Kevin Bailey, a former Australian soldier who is East Timor's honorary consul in Melbourne, where he runs a financial planning company. "We are the Steven Bradbury of the world's sovereign wealth funds," he says, citing the unlikely gold medal won by an Australian skater at the 2002 Winter Olympics when all four of Bradbury's better-rated opponents fell over in the manic sprint to the finish, leaving him as the last man standing. Heavily exposed to banks and property, Singapore's state-owned Temasek Holdings, for example, lost 31% of its $285 billion portfolio last year. "If only Singapore had put its hard-earned [cash] in T bills and not Merrill Lynch," says Bailey.

In sleepy Dili, where no building is taller than three stories, Alves Maria's job is a little like logging on to an online bank account, except the numbers are bigger. He monitors the millions in royalties that roll into the fund and makes sure the bond purchases are executed in New York. The royalties--mostly from ConocoPhillips' Bayu Undan gasfields--arrive like clockwork and get electronically dispatched to their programmed investment, with JPMorgan and other advisers looking on.

There's another area where the East Timorese could teach Wall Street's big shots a thing or two--transparency. Anyone can see how the fund is doing simply by visiting its Web site or coming by Alves Maria's office. Every three months he compiles a legally required report--in East Timor's two official languages, Tetum and Portuguese, as well as English--and posts it on the central bank's Web site. And every quarter he uses the same template. "The only things I change are the date of the report and whatever the financial data is for that quarter," he says. The most recent posting, for the quarter ended Dec. 31, 2008 shows that gross cash inflows were $586 million, comprising $402 million of royalties and $184 in tax revenue (East Timor's very modest tax take goes into the fund, too). The fund earned $129 million, a return of 3.3% for the period.

Some of the fund's advisers worry that investing only in Treasury bills leaves the fund too vulnerable to a fall in the U.S. dollar. That won't change anytime soon, but a big part of Alves Maria's job is devouring enough financial literature for the day when East Timor does decide to diversify the fund. Another of his tasks is to keep at bay the carpetbaggers who parade to his door (and his in-box) hawking all manner of dubious schemes. They're seeking to separate East Timor's future from its petrodollar windfall, but Alves Maria aims to prevent the country from repeating the sorry experience of another tiny resource-rich Pacific nation, Nauru, which squandered its bounty by mismanagement in the 1970s.

An economics graduate of a university in East Java when East Timor was still Indonesia's 27th province, Alves Maria is part of Dili's "postconflict generation," young technocrats schooled abroad who've returned to take key posts in an administration short on skills. It hasn't always been easy: He reconciled the fund's 2006 accounts while living in a refugee camp after rioters tore through the capital. He proudly tells how his wife gave birth to their first child in a makeshift camp hospital on June 30, 2006, the last day of the fiscal year.

At some point, East Timor will need to decide how to use the fund. Any decision to spend the money--other than for routine government expenses--requires layers of approval, starting with the country's feisty finance minister, Emilia Pires. Such a consensus is unlikely, given the near-constant political turmoil in East Timor since it gained independence in 2002 after 24 years of often brutal Indonesian military rule. Pires would like to use the fund to diversify the economy away from resources. Opposition leader Mari Alkatiri--who, as independent East Timor's first prime minister, negotiated the ConocoPhillips deal and set up the fund--says it's too early to dip into it. He worries not about the transparency of the fund, which he describes as well-managed, but about the potential for corruption on the fund's fringes--cushy advisory jobs, procurement backhanders and the like. Even in developed countries, this is hard to avoid: Last month New York indicted two advisers to the state's $123 billion pension fund, charging that they skimmed off $30 million.

Still, the fund is about the best thing going for East Timor. The World Bank says half of East Timor's 1 million people live under the poverty line. The country ranks in the bottom ten of just about every human-development index. Life expectancy is 45. Despite ten years of being propped up by international aid, the country's infrastructure is virtually nonexistent.

But with up to $50 billion in oil and gas royalties expected to be collected in the decades ahead, all guaranteed by treaties with Australia, East Timor could become one of Asia's richest nations. It's a natural bounty that Pires says was "paid for by the lives of 200,000 of our people," the estimated number of East Timorese killed by Indonesian forces during Jakarta's occupation. "We can be Equatorial Guinea, or we can be Norway," Pires says. "And with proper and smart use of the fund, my hope and intention is to be better than Norway."