Business | Investment
Sovereign funds making a noise all over the place
The stellar growth of sovereign wealth funds (SWFs) in recent years is set to continue, according to the latest research from a City of London thinktank.
- By John Willman, Financial Times
- Published: 00:34 April 5, 2008
The stellar growth of sovereign wealth funds (SWFs) in recent years is set to continue, according to the latest research from a City of London thinktank. International Financial Services London (IFSL) estimates that assets under management will rise to $5,000 billion by 2010 and $10,000 billion by 2015.
Much of the attention has focused on the $3,300 billion of assets managed by the conventional SWFs - up 18 per cent in a year. But there is almost double that amount in other government-controlled investment vehicles that are also growing fast.
Countries such as the US, Japan and Sweden hold funds of about $3,000 billion, sometimes through social security institutions, to finance future payouts on pay-as-you-go schemes. Other non-SWF funds include government development funds, government investment corporations and the overseas investments of government-owned enterprises.
Conventional SWFs are larger than hedge funds and private equity combined. But all the varieties of sovereign investment funds are dwarfed by the $75,000 billion institutional investment pool that contains pension funds, mutual funds and insurance investments.
But SWFs are growing much faster, according to IFSL, and will continue to do so, as long as oil and other commodity prices remain high and economic growth continues to boost foreign exchange reserves.
The largest SWF remains Abu Dhabi Investment Authority (ADIA), created in 1976 to invest oil trade surpluses and now estimated at $875 billion. Norway's Government Pension Fund, which has invested much of the country's North Sea oil riches, is worth $380 billion.
The Kuwait Investment Authority (KIA), the oldest SWF, is worth $250 billion, and IFSL estimates that Saudi Arabia's holdings - not yet formally organised in a conventional SWF - are worth $300 billion.
Other oil and gas producers with funds include Russia, Qatar, Libya, the US state of Alaska and Brunei.
These commodity funds account for almost two-thirds of the total, but funds investing foreign exchange reserves have been growing faster. With $1,200 billion of assets at the end of 2007, they have doubled in size in three years and will rise to account for half the SWF total by 2015, IFSL predicts.
Much of this growth is expected to come from Asian countries, whose share of official currency reserves has risen from a third of the global total to two-thirds over the past decade. Singapore's two SWFs are among the 10 largest and are jointly worth almost $500 billion.
One of the newest funds is China Investment Corporation, whose $200 billion of assets is expected to grow sharply. China's foreign exchange reserves rose 43 per cent to $1,500 billion in 2007, and the government last year said it needed just $1,000 billion of that to be held in government securities.
Concerns
The deployment of these funds in the US and parts of Europe has raised concerns over their intentions. Critics say they are opaque and could make investments for political rather than commercial reasons.
Funds have been urged to become more transparent and use external managers to allocate investments in line with publicly stated strategies. IFSL says that almost half SWF assets are managed by external managers, but predicts this could fall as they develop their own expertise.
Public disclosure of investment management strategies varies widely, it adds, but is "overall very limited". Stated objectives include risk diversification, avoiding domestic equity and commodity exposure, long-term returns and investments into strategic industries.
There has been a move from passive to active investment strategies - taking control of companies through mergers and acquisitions, or by acquiring minority stakes. More than three-quarters of cross-border acquisitions last year were in the financial sector, up from a quarter the year before, reflecting demand for capital injections from banks hit by the credit crisis.
The influx of capital to bolster bank balance sheets has been welcomed by regulators and governments, which have seen the SWFs as white knights. But if future growth accelerates as the IFSL predicts, the controversy may well return.
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