Sovereign wealth funds focus on the home front

EVENT: A new Saudi sovereign wealth fund (SWF), Sanabil Al Saudia, started operations last week.

SIGNIFICANCE: Gulf SWFs have recently initiated major changes in their investment strategy. They have shifted away from investing in Western markets, particularly the financial sector, and started to invest in local businesses and banks. Moreover, they have decreased the dollar ratio in their investment portfolio and started to be more transparent as a response to the global anxiety over their investment goals.

Arab SWFs have retreated somewhat from global markets as the value of their investments has fallen and have focused more on domestic economies.

Gulf investors have also shown more interest in future development plans in their home countries.

The Gulf states, with more than 50 per cent of the population under the age of 24, are urgently seeking to create jobs and to develop human capital.

ANALYSIS:

A key common characteristic of the capital-rich Gulf SWFs is that their management is subject to a high degree of control by the government. A shift in investment strategy was essential in the current crisis in order to bolster their local economies. This switch will both affect the global financial system and accelerate social and economic development in the region.

Gulf funds Gulf SWFs vary in nature from: stabilisation funds (Oman); to classic investment funds (Abu Dhabi and Kuwait); and newer, smaller investment companies prioritising concentrated stakes in public and private equity (Qatar Investment Authority, Dubai International Capital, Istithmar, Mubadala).

Gulf central banks, including the Saudi Arabian Monetary Authority (Sama), manage non-reserve assets in a more conservative manner.

Saudi funds Until the announcement of the launch of a Saudi SWF in 2008, no dedicated oil investment fund existed in the kingdom. Sama has been often considered as the Saudi SWF with a portfolio investment mainly in dollars - 20 per cent in cash/deposits, 55 per cent in fixed income, and 25 per cent in equities, with no interest in private equity stakes or emerging markets.

The launch of a SWF fits into Saudi King Abdullah Bin Abdul Aziz's rationalisation of Saudi governing institutions to streamline decision-making, diversify the Saudi economy, and attract more foreign investment. Moreover, Saudi Arabia has just recovered from more than a decade of debt due to low oil prices in the 1980s and the devastating economic effects of the Gulf War in 1990.

The new Saudi SWFs are much smaller than Sama's reserves:

Sanabil Al Saudia has about $5.3 billion (Dh19.4 billion) to invest in stocks, bonds, real estate, foreign currencies and commodities and was established by the Public Investment Fund (PIF) in July 2008. It started work last week.

Hassana, owned by General Organisation for Social Insurance (GOSI), represents an attempt by the government to grant the largest state-run pension fund greater independence from the central bank in managing its investments, mainly abroad. It was established by the Council of Ministers in March but there have been conflicting reports about its nature.

Abu Dhabi The Abu Dhabi Investment Authority (ADIA) is generally estimated to be the biggest commodity SWF in the world:

About 80 per cent of its assets have been managed by external managers.

ADIA's portfolio has been highly diversified, and modelled on a large US or European pension fund, or the portfolio of a US university endowment.

The currency composition of ADIA's assets has been relatively balanced between US dollar and euro.

In 2002, the Mubadala Development Company was established as a government-owned investment vehicle. Mubadala's mission was to develop the industrial base of Abu Dhabi by encouraging low-labour, high-tech, high-energy, and capital-intensive openings in areas such as basic metals and aerospace, tourism and property development. Other funds include:

Abu Dhabi Investment Council (newly established, focusing on regional and international investments);

International Petroleum Investment Company (established in 1984, focusing on energy-related businesses);

Aabar (established recently, operating as a tool for diversification);

Taqa (aiming to become a global energy operator);

Advanced Technology Investment Company (semiconductor maker); and

Abu Dhabi Investment Company (a smaller fund focusing on regional investments).

Dubai SWFs comprise several investment companies with highly diversified portfolios from real estate to ship repair and marine-related activities. The major Dubai funds are Investment Corporation of Dubai (ICD) and Dubai World:

ICD is divided into two major corporations: Borse Dubai (a holding company for Dubai Financial Market and Nasdaq Dubai) and Dubai Holding (with seven major subsidiaries: DIC, Dubai Group, Dubai Property, Sama Dubai, Jumeirah Group, Tecom Investment and Tatweer).

Dubai World's holdings include most notably Istithmar, Nakheel, and DP World (international terminal and port manager).

Kuwait The Kuwait Investment Authority (Kia) is one of the most transparent Gulf SWF with a relatively diversified portfolio. Kia's assets have been both managed in house and by external asset management companies. Its portfolio has been divided mainly between dollar and euro, although a small share has been invested in emerging market currencies. Kia is the oldest commodity-based SWF and has been operating for more than five decades.

Investment shifts Arab SWFs have retreated somewhat from global markets as the value of their investments has fallen and have focused more on domestic economies:

Kia has shifted $4 billion from Western markets into its own bourse.

Qatar Investment Authority has begun a bailout of local banks.

In addition, the Gulf funds had previously been passive investors who did not seek to take part in the decision-making process of the companies in which they invested. However, recent acquisitions by Arab investors have shown that many of the funds are now determined to take a more active role in the management of the companies in which they own stakes.

Gulf investors have also shown more interest in future development plans in their home countries:

The Gulf states, with more than 50 per cent of the population under the age of 24, are urgently seeking to create jobs and to develop human capital.

One of the strategies of Arab SWFs will to invest in entities that can promote the creation of jobs and the development of labour force in their domestic economies.

The Gulf SWFs are also shifting away from dollar-denominated investments to prevent the dollar share of their portfolios from getting too large. The euro area offers a major diversified market for these funds.

The major acquisitions of Gulf SWFs in the US markets are concentrated in financial sector; their portfolio in Europe includes a variety of shareholdings from German car manufacturing companies to Polish telecommunication corporations.

Transparency issues Gulf investors have also recently shifted towards applying a higher level of transparency. Gulf SWFs that were looking to acquire stakes in some of the biggest global companies have realised that they can no longer hide behind their traditional defence that their investment activities and financial markets are both still nascent. Governments have also taken action:

Saudi Arabia's Capital Market Authority has initiated reforms focused on company disclosures.

Abu Dhabi has establishment an Accountability Authority which aims to ensure financial transparency and improved performance in the public sector.

Dubai has cracked down on corruption.

CONCLUSION:

Gulf asset management policies are refocusing much more on domestic economies as well as emerging market economies, while improving transparency of operations is now a major concern for SWFs and governments alike. While the attention to their domestic economies may decrease once the economic downturn eases, portfolio diversification and investment in emerging markets are likely to grow in prominence among regional funds.