Business | Investment

Are sovereign wealth funds still focused on long term?

Investors prove timing is everything when it comes to making profit

  • by Trevor McFarlane, Special to Gulf News
  • Published: 00:00 December 19, 2009
  • Gulf News

Timing, perseverance and conviction are the three wise men of investing. Arab sovereign wealth funds (SWFs) seem quite astute in all three departments — making handsome rewards on a string of short-term investments. But as they enjoy their spoils observers are asking where their long-term investment strategies have gone.

On December 6, the Kuwait Investment Authority (KIA), Kuwait's SWF, announced it made a $1.1 billion (Dh4.04 billion) profit on the investment it made in Citigroup in January 2008. It initially invested $3 billion, meaning its investment grew 37 per cent — a healthy return by anyone's standards.

As the news of the Kuwaiti deal reverberated around the business world, some commentators in the Western media began to question the nature of Gulf state-backed funds. Instead of being the self-dubbed long-term investors, they asked, could these SWFs have switched tactics to become "short term profiteers"?

Long haul

On the face of things, they have a point. Besides the Kuwaiti deal, other Gulf sovereign wealth funds recently sold stakes in foreign banks, registering significant returns on short-lived investments.

In June, the Abu Dhabi government-owned International Petroleum Investment Company (IPIC) made an impressive profit when it cashed in a large part of its £3.25 billion (Dh19.52 billion) stake in British bank, Barclays for a £1.5 billion profit. Similarly, Qatar's fund sold a part of its stake in the same institution after the value of its investment almost doubled.

Critics of these government funds say these sales by investors who went in saying they had "a long-term vision" have bewildered stakeholders. The KIA announced in September they were in Citigroup for the long haul but then backtracked, deciding to book the profit instead.

The big question remains then — does such evidence merit a query of Gulf sovereign funds' credentials as long-term investors? The simple answer is no, and in these particular cases it is irrelevant and in some ways unfair.

After all, when the thunder clouds of the financial crisis first loomed, many in the West were just plain grateful for petro-dollars. British Prime Minister Gordon Brown was in Abu Dhabi last year saying GCC nations that help ease the suffering caused by the international financial crisis should enjoy more influence in the International Monetary Fund (IMF).

SWFs answered this call, which was coming not just from Brown but a raft of other Western countries too, and rode to the rescue of financial institutions with balance sheets dripping in red ink. If they had not, Western governments — meaning taxpayers, would have been saddled with even larger banking bailout packages.

Either way, they are right to sell, even if their status as long-term investors is called into question.

They were the financiers ready and willing to part with their cash when the banking system was on its knees. They should, like any investor, be entitled to reassess their position to exploit favourable circumstances.

After all, although SWFs claim to employ an overall long-term investment strategy, it would be imprudent of them not to treat each deal on its individual merits — especially during an unprecedented global crisis.

Battered

Nevertheless, critics will say state funds hoodwinked the investment community. Though the sniping is misplaced — the reason for it is clear. While SWFs gleefully rub their hands at spectacular returns, ordinary shareholders have been battered by the vicissitudes of the stock market. In January 2008, Citigroup's stock was trading over $25 a share; it is now trading at around $4 a share, yet the KIA managed to make $1.1 billion profit by selling its stake of preferred shares.

As unfortunate as this is for normal stockowners, the KIA and other regional investment funds cannot be held responsible.

In fact, it is simply the art of investing. As Hesiod, the Greek poet and farmer labelled by some as the first economist, wrote, "Observe due measure, for right timing is in all things the most important factor."

Savvy Arab investors obviously paid heed to the old adage.

 

— The writer is editorial manager of the Oxford Business Group, Abu Dhabi.

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