SWFs experience 18 per cent growth amid global downturn

Despite recent investment losses, sovereign wealth funds (SWFs) collectively grew by 18 per cent in 2008, bringing the sum of assets held by the vehicles to US$3.9 trillion, a report from International Financial Services London (IFSL) found.

But the global economic downturn and fall in commodity prices – particularly in oil – would staunch inflows to SWFs and foreign exchange accumulations in coming years, IFSL wrote in the report, entitled Sovereign Wealth Funds 2009.

However, looking through the downturn, the dominant trend for SWFs was growth: IFSL estimated that aggregate SWF assets would to double to reach $8 trillion by 2015.

The report also calculated that the gradual trend among SWFs to implement more active investment strategies, which included taking minority or controlling stakes in companies and investing in unlisted assets, accounted for $187 billion of SWF investment between 1995 and July 2008.

Most of these investments – 62 per cent – were made in the financial sector.

This included the collective $60 million that predominantly Asian and Middle Eastern SWFs made in US, UK and Swiss banks at the outset of the financial crisis in 2007 that produced substantial losses.

Since then, the funds have focused on injecting liquidity into their domestic economies in attempts to stimulate economic growth, IFSL reported. Several Middle Eastern governments have invested directly in domestic banks.

But most of the investments made by SWFs of oil-exporting countries were still placed in the US and European markets.

“Around four-fifths of oil-exporting countries’ funds are invested in overseas assets,” IFSL stated.

Equity investments accounted for almost 50 per cent of these overseas investments, followed by fixed income, at 25 per cent, and bank deposits, at 15 per cent.

“Government bonds are increasing their share as SWFs have become more risk-averse following losses on some of their equity investments over the past year,” IFSL wrote.

The funds were also investing more in real estate, since the long-term nature of such investments suited their horizons.

“The US is the destination for more than a half such investments with Europe the next largest destination with around a fifth of investments.”

Citing Deutsche Bank research, IFSL stated that the investment strategies of SWFs could result in a gross capital injection exceeding $1 trillion into equity markets and $1.5 trillion into debt markets between 2008 and 2013.

IFSL also flagged an expected increase in the size of non-commodity SWFs relative to commodity SWFs.

At the end of 2008, SWFs funded by commodity export revenue totalled $2.5 trillion, while non-commodity SWFs, funded by transfer of assets from official foreign exchange reserves, held $1.4 trillion.

But by 2015, IFSL calculated, non-commodity SWFs would grow from to account for 55 per cent of SWF, up form 35 per cent at present.  

The report also found that an additional $5.5 trillion flowed into other sovereign vehicles, such as pension reserve funds, development funds and state-owned investment corporations.