Tuesday, May 5, 2009
The New Rulers of Global Finance
Sovereign wealth funds are fast becoming the new master of the global finance. In what kind of assets and countries are they mostly investing?
The more successful high-saving export-oriented countries in the East have accumulated massive foreign currency reserve which is channeled into investments through their Sovereign Wealth Funds (SWF). According to the study, such fund – most notably those from East Asia, Russia and other oil-exporting countries-have US$2.8 tn in assets and are multiplying their acquisitions. The largest of such funds are in the Middle East, thanks to the world’s instable demand for oil and rapidly rising oil prices. The Abu Dhabi Investment Authority (ADIA), for example, has recently bought a 4.9% stake at US$7.5 bn in Citigroup, becoming its single shareholder. The AIDA was reported to have bought an undisclosed stake in Sony; Dubai Sovereign Funds are also snapped up shares in big names such as MGM Mirage casinos, aerospace giant EADS and the Barneys departmental stores. The Singapore Investment Corporation has also been very proactive. After acquiring a 12% stake (US$4 bn) to become largest shareholder of Standard Charter Bank, it has bought 9% (US$9.75bn) of UBS, a record single investment by a SWF.
The China Investment Corporation, set up to manage US$1.4 tn foreign currency reserve, has just acquired a 9.9% stake (US$5 bn) in Morgan Stanley, Wall Street icon, in the wake of of its earlier 10% stake (US$ 3bn) in Blackstone, a private equity premier league, player of the US. In addition, all of China’s big multinational are controlled by the state. Their funds and investment are often are considered in the same category. For example, China’s Industrial and Commercial Bank of China (the world largest bank by market capitalization) has taken a 20% stake (US$5.6 bn) in the Standard Chartered Bank-the largest single direct investment in Africa-the largest bank in South Africa. This follows China Development Bank’s acquisition of a 2.6% stake (US$3bn) in Barclays Bank of the UK and Critic Securities’6.6% stake (US$1 bn) in Bear Stearns of the US. China has now spent US$29.2 bn in acquiring overseas assets.
Although SWFs are growing fast, it is an overstatement to say that they are becoming the new masters of the global finance. Estimates of the size of SWFs are in the range of $2-3 tn. This is significant, but much smaller than assets currently managed by insurance companies ($16-18 tn) and pension funds ($18-26 tn ) and a drop in th ocean compared to global assets under management of $55 tn. Estimates of the future size of these funds very widely, ranging from $5 tn to $10 tn in the first year of the next decade. Yet, they will still be dwarfed by some other institutional investors.
As many important SWFs do not disclose their assets composition, I do not b have clear picture of their investment strategies.
However, Norway’s Government Pension Fund does publish its benchmark. Fixed income has a 60% share, allocated as follows: 60% to Europe, 35% to the Americas and Africa, and 5% Asia and Oceania. Equities have a share of 40%, of which 50% is is allocated to Europe, 35% to the Americas and Africa, and 155 to Asia and Oceania.
The Norwegian example might not tell us much about the assets composition of the other SWFs, except that they are probably all invested in higher yielding and more risky assets, including equity, than traditional foreign exchange reserve would be.
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