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05 March 2024

This year's most in-demand guests: Sovereign funds

By Agencies



Business and political leaders will be queuing up to talk to sovereign wealth investors at the Davos forum as debate rages over whether these cash-rich funds are the saviours of global finance or a threat to economic stability.

Sovereign wealth funds, state-run investment vehicles which manage assets of over $2 trillion, have shot up to the main stage of the world economy in the past few months with their $60 billion injection into banks hit by the US mortgage debacle.

The sheer scale of their investments became more evident as funds from Asia and the oil-rich Middle East poured nearly $20 billion into Citi and Merrill Lynch.

Eager to find investment destinations for their burgeoning coffers, SWFs are transforming the landscape of global markets after liquidity dried up for hedge funds and private equity.

"Emerging markets have lived up to their name, and are now a greater economic bloc than the United States. These are countries that are giving emergency aid to the world's rich countries," said Filip Weintraub, portfolio manager at Norway's Skagen Global.

"They now have appetite for risk to increase returns. Then (the West) run into a dilemma - you need the money but you don't want to give up control. You don't want to sell up a part of such an important part of your infrastructure."

In the Swiss ski resort of Davos, business leaders will have a rare chance to mix with managers of the world's top wealth funds at the annual World Economic Forum meeting.

Next Thursday's session on SWFs brings key speakers in the field, including Bader Al Sa'ad, head of the Kuwait Investment Authority; Muhammad Al-Jasser, Vice Governor of Saudi Arabia's central bank; Alexei Kudrin, Russia's finance minister; Kristin Halvorsen, Norwegian finance minister and Robert Kimmitt, US deputy Treasury Secretary.


As the SWF's assets set to reach $12 trillion by 2015 -- almost 10 per cent of all financial assets in the world -- rapid growth and their often opaque strategies have raised alarm bells among the developed economies.

Politicians worry that rapidly-growing SWFs could invest with political rather than economic motives, gaining control of firms important to national security.

US Senator Evan Bayh, an Indiana Democrat, has warned that a lack of transparency undermined the theory of efficient markets at the heart of the US economic system.

"There will be a massive debate around sovereign wealth funds in Davos," said Mark Spelman, head of global strategy at Accenture.

"The EU and the US are already beginning to work together to make sure there is transparency. There is a strong feeling in the West that there is a potential for an uneven playing-field."

Some see SWFs as having a longer investment horizon and a higher tolerance for swings in their balance sheets than hedge funds or private equity, hence providing a welcome source of liquidity and stability rather than volatility in markets.

"To the extent that SWFs improve market liquidity, particularly in a way that is not herdish like other types of short-term capital flows, SWFs should be a positive factor for markets in general," Stephen Jen, global head of currency research at Morgan Stanley, said in a note.


Relatively young SWFs, with heaps of money but little investment experience, also offer lucrative opportunities to the investment community.

Morgan Stanley reckons SWFs in the aggregate may outsource around 20 per cent of their assets to external investors, placing as much as $200 billion in the next five years.

For SWF managers, the World Economic Forum provides an ideal recruiting ground as they scour the world for talent to maximize investment returns on their trillions.

Pressure on them to boost returns is enormous. Lou Jiwei, head of China's new $200-billion state fund, has said that he needs to earn $41.47 million a day just to cover the cost of the bonds issued to finance the agency.

"We are civil servants and it's hard for us to match salaries of private-sector fund managers or provide a competitive remuneration package. So getting the right people would be difficult," a senior Asian central bank official, whose country has yet to establish a sovereign fund, told Reuters.