SWFs should diversify and target Arab states: report

Dubai's sovereign wealth funds (SWFs) may be new but they have nevertheless managed to establish themselves as professional investment organisations in the securities portfolio field, according to the Emirates Centre for Strategic Studies.

The centre said in a study that Dubai International Capital (DIC) aims to have assets worth $10 billion (Dh36.7bn) under management within the next two years.

The Abu Dhabi Investment Authority (Adia) was a pioneer among global sovereign wealth funds, said the study 'Sovereign Wealth Funds Between Western Challenges and Gulf Horizons', compiled by researcher Sharif Shaaban Mabrouk.

"It successfully plays the role of professional investor in investment portfolios in a way gradually ensuring the transformation of Abu Dhabi's oil wealth into well-managed financial assets," said the report. But the study called on GCC SWFs to diversify their investments and concentrate on economic sectors in their home countries as well as Arab countries. This would boost the growth of their countries, both economically and socially, and attract more foreign investment.

The economic, financial and political effects of the crisis transformed GCC sovereign funds from marginal investors into major global investors greater responsibility for the stability of global financial markets.

The funds refrained from investing in the global financial sector after the crisis and instead headed for new fields, the most prominent of which was the exploration of natural wealth and the consolidation of their positions in the petrochemical industry, according to the study. They also sought to acquire assets from top global companies.

The study said GCC SWFs are not investment weapons that can be used for political purposes – the way they are seen by the United States and some other Western countries. The status of the GCC states does not depend on their military or industrial strength or their effect on international organisations, as is the case with China.

In addition, the commercial importance of the GCC states does not stem from the size of their exports but from the nature of the product exported – oil. These GCC funds do not engage in political or intelligence activities because these practices would not serve the interests of their countries. So, the study said, there is no need to worry about them.

However, the study said the GCC SWFs have some problems which reflect negatively on their home countries.

Falls in the value of the US dollar represent a major challenge. The dollar lost a third of its value against other major currencies between 2001 and 2008, which resulted in huge financial losses for the funds.

In addition, the fall in oil prices due the international financial crisis, which saw the price of a barrel of crude fall by two thirds, led to a decline in the financial surpluses of oil-exporting GCC states and exposed their sovereign funds to large losses.

The crisis exposed the weakness of claims that investments in the US and European states are very safe as these countries provide guarantees, transparency, profitability, investment diversification, advanced telecom services and experts.

The West should realise that the global balance of economic power is currently in a state of transition and the major new role of GCC SWFs is not a passing phase but a new and sustainable factor in international financial relations. Their funds will become a necessary part of Western economic diplomacy.

The study said Adia is seen as a major player among global sovereign funds.

But its policy of revealing little information about its activities made it a target for wide ranging speculation regarding to its seize and impact on global financial markets. Adia is attempting to be clearer about its investment policy. It invests between 44 and 54 per cent of its assets in advanced markets, between eight and 12 per cent in emerging markets, between 12 and 18 per cent in government bonds and between five and 10 per cent in properties.

The remaining percentage was invested in private shares, small capital shares, infrastructure and liquidity. Regarding the currencies that Adia owns, the US dollar is estimated to account for 45 per cent, the euro for 40 per cent and the yen for five per cent while the currencies of emerging markets form the remaining percentage.

Mubadala has developed international partnerships in the energy, real estate, aviation, healthcare, technology, infrastructure and service sectors. The fund's commercial strategy involves long-term intensive capital investments designed to achieve significant financial returns. Its most prominent investments are its 35 per cent stake in aircraft industry company Piaggio Aero, an 8.1 per cent stake in Advanced Micro Devices and a 7.5 per cent stake in a private equity firm belonging to the Carlyle Group.

Ipic concentrates its investments on projects connected with the oil industry. It has a diversified investment portfolio that includes partnerships with many global companies, including investments in OMV Group, Austria's largest company and one of the most prominent global oil and natural gas groups.

Ipic has other investments in refineries and petrochemical companies. The company has recently become more active in Central Asia, where it launched a $1bn fund to invest in energy and other sectors.

Adic, which was set up in 2006, aims to invest government funds inside and outside Abu Dhabi, diversify investments, provide sufficient guarantees for invested funds and coordinate with investment projects carried out by government bodies in the emirate.

The study said Dubai is a relative newcomer to SWFs. Its most important funds include ICD, which was set up in 2006. ICD's portfolio contains all companies that are partially or fully owned by the government, including Emirates, Dnata, Dubai Aluminum, Emirates NBD Bank, Emirates National Oil Company, Dubai Islamic Bank, Emaar Properties and the Dubai International Financial Centre.

ICD supervises the government's investment portfolio, seeks to obtain added value through the application of best international practices in company governance and implements the international investment strategy. Istithmar World, Dubai World's investment arm, was set up in 2003 with capital of $12bn. It has purchased shares valued at $3bn in more than 30 companies and has assets in the financial, industrial and real estate service sectors. Its most important investments are a 2.7 per cent stake in Standard Chartered Bank, a three per cent stake in GLG –Europe's largest alternative assets management firm with assets of $20bn – and investments in international companies specialising in pensions. DIC was set up in 2004 with capital of $13bn for the purpose of building an international portfolio of commercial assets in North America, Europe, Asia-Pacific, the Middle East and North Africa.

DIC has large investments in Japan's Sony, Britain's HSBC Holdings and Holland's EADS. The study said Dubai's SWFs have developed over a short period and became professional investment establishments in the field of securities portfolios.

However, the author said it is not easy to define any clear strategic co-ordination between the funds in support of the development of Dubai's economy, or strategic directions that the funds' investments follow.

The study said the world's SWFs, including the GCC funds, have felt the effects of the crisis. Statistics show that the value of the GCC external financial portfolio fell from $1.3trn in 2007 to $1.2trn in 2008.

In addition the value of the external assets of the funds of Kuwait, Qatar and the UAE fell from around $1trn at the end of 2007 to around $700bn at the end of 2008. "There has been an excessive trend towards investing in the Middle East, North Africa and Asia," added the study.

"That enhanced the economic role of GCC states in the Middle East and North Africa over past five years. Through their sovereign funds, the GCC states allocated part of their investment to Arab states, especially Egypt, Morocco, Jordan and Syria. Investment channels covered various sectors, such as industry, real estate and infrastructure."

The study said GCC investment bodies that supervise the management of SWFs should work together to define a new map for combined or individual financial investment through the introduction of new priorities in their external investment programmes that depend on diversification.

Despite the major importance of the economies of Western countries, other countries offer good opportunities. Asia and Africa in particular have promising markets and attractive laws for investment.

The study said the GCC sovereign funds should implement five measures: 

- The transference of knowledge through investments.

- Consolidation of government companies. 

- The alleviation of the impact of the economic crises. 

- The consolidation of regional and international co-operation through the setting up of joint funds at the regional and international levels by GCC funds. 

- The implementation of reforms to boost confidence.


Top players

According to Sovereign Wealth Fund Institute figures, three GCC countries – the UAE, Saudi Arabia and Kuwait – are among world's 10 largest states in terms of SWFs. Adia comes first among the world's SWFs with assets valued at $627bn. The Saudi Arabian Monetary Agency comes second with assets worth $431bn, and the Kuwait investment Authority is seventh with assets worth $202.8bn.

According to the projections by the International Monetary Fund, the assets of international sovereign funds will range between $5 trillion to $10trn over the next five years. International Financial Services London estimates that the funds' assets will increase to $5trn by 2010 and $10trn in 2015.

Total assets held by SWFs in the GCC states are estimated to be worth more than $1trn. If assets held by central banks – estimated to be worth $460bn – are added the value of the combined portfolio of the Gulf's SWFs totals $1.5trn


Major destination

The study said the UAE has eight international sovereign funds – four in Abu Dhabi, three in Dubai and one in Ras Al Khaimah.

Abu Dhabi has Adia, Mubadala Development Company, the International Petroleum Investment Company (Ipic) and the Abu Dhabi Investment Council (Adic). Dubai has Investment Corporation of Dubai (ICD), Istithmar World and DIC, while Ras Al Khaimah has RAK Investment Authority with assets worth $1.2bn.

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