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SWFs To Continue Focusing On Overseas Investments « Back
Pauline Renaud, April 2010
Amid the economic downturn, it came as no surprise that the assets under management of sovereign wealth funds (SWFs) dropped by 3 percent to about $3.8 trillion for 2009, according to a report by International Financial Services London (IFSL) entitled ‘Sovereign Wealth Funds 2010’. However, assets are expected to rise to $5.5 trillion by the end of 2012, explained the London-based think tank.

IFSL added that sovereign investment vehicles, such as pension reserve funds and development funds, held an additional $6.5 trillion last year, up 13 percent from the previous year. In addition, SWFs picked up the pace of foreign asset investing during the second half of 2009 and more funds are looking to place a greater number of those assets outside their home country.

“The $10bn invested during the first half of the year represented the slowest start to a year since 2005. But investments picked up however in the second half with much of the $50bn invested during this period allocated to foreign markets, primarily Europe and North America,” IFSL said in the report.

“Recent SWF transactions suggest that acquisitions will be smaller and more diverse in the coming years with more focus on diversifying portfolios by investing in real estate, commodities and emerging markets.”

The report gives the example of China Investment Corporation (CIC), which has $289bn under management and is the fifth largest SWF. Last year, it invested $15bn internationally in assets such as commodities, private equity and hedge funds. More precisely, a Securities and Exchange Commission filing showed that CIC invested $9.6bn in US-listed assets, with 25 percent of this money using exchange traded funds to get exposure to the US, according to online magazine Global Pensions.

But CIC, as well as many other SWFs, reduced its investments in financial services. Indeed, the sector accounted for less than a fifth of investment in 2009, much less than the 45 percent share witnessed at the start of the decade. Instead, the report explained, a larger proportion of funds was allocated to industry, infrastructure and other sectors.

Indeed, in late 2007 and early 2008, Middle East and Asian governments injected cash into lenders such as Citigroup, UBS, Merrill Lynch and Morgan Stanley. The losses incurred on those investments to the end of 2009 ranged from 10 percent on Credit Suisse to 90 percent on Citigroup. Such losses initially calmed sovereign wealth funds’ appetite but, by the second half of the year, they were investing again internationally, notably in industry, infrastructure and other non-financial services sectors.

The IFSL also said that the mark-to-market values of SWFs’ portfolios increased 15 percent last year, although they still held losses on investments at the outset of the financial crisis. But the current downturn also highlighted the growing role of investment by foreign governments, as market conditions have been characterised by scarce liquidity. “SWFs funded by commodities exports, primarily oil exports, totalled $2.5 trillion at the end of 2009. Non-commodity SWFs, funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses, pension reserves and privatisation revenue, totalled $1.3 trillion,” according to the report.

“Non-commodity funds are capturing an increasing share of SWFs’ assets, a trend that is likely to continue in the coming years.” The report explains that, as official foreign exchange reserves grew in recent months, particularly in some Asian countries, totalling $7.5 trillion at the end of 2009 – and a fifth of this amount was held in SWFs. According to IFSL, this was nearly twice the total in 2004. As a result, such funds are capturing an increasing share of global SWFs, and their one-third share at the end of 2009 may increase to 38 percent by 2012.

Finally, the report explained that, last year, London continued to be an important hub in the SWF industry as a clearing house and location from where some funds are managed. “The financial services industry in the UK welcomes investment by SWFs on the basis that the UK has a regulatory, competition and national security framework that ensures that all foreign investment, whether from a SWF or not, meets the appropriate criteria.”

Those various findings suggest that, as SWFs’ profile has risen substantially of late, they will likely become even more important participants in financial markets worldwide in 2010 and further ahead, as inflows from trade surpluses and commodities’ exports continue.

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