Growth of Sovereign Wealth Funds

by Clare Bowden

  • 09 Mar 2011
  • RE

The aggregate total assets of all sovereign wealth funds (SWFs) worldwide has continued to increase at a significant pace in the last 12 months, in spite of the slow recovery of the developed economies and continued uncertainties surrounding the performance of certain asset classes. The growth in aggregate assets under management also occurred against a backdrop of some SWFs continuing to be subject to capital withdrawals by their respective governments in order to cover fiscal shortfalls. Having halved in size over 2009, Russia’s Reserve Fund was once again used to balance the federal budget over the course of 2010, with its total assets standing at $25.4 billion at the start of 2011, compared to $60.5 billion at the beginning of 2010. In December 2010 alone, $15.4 billion was taken from the fund by the federal government to cover spending. Other SWFs, such as Chile’s Pension Reserve Fund, have not received as much in contributions from their governments as in previous years.

Despite the issues for some of these institutions, the collective influence of sovereign wealth funds as a global group of large investors has once again increased over the last year. The aggregate assets under management of SWFs now stands at nearly $4 trillion, an 11% increase from last year. The 2010 figure of $3.59 trillion also represented an 11% increase on the previous year ($3.22 trillion).

The current political unrest in the Middle East and North Africa, however, could have consequences for the future directions of certain sovereign wealth funds that are controlling significant amounts of assets. The Libyan Investment Authority (LIA), for example, has an estimated $70 billion in total assets. In recent years following the easing of sanctions and restrictions imposed by the international community, LIA had been able to invest more freely in assets around the world in order to manage Libya’s oil revenues. Whether its mandate would change as a result of any political change in the country remains to be seen. Other countries undergoing political discord that have significant sovereign wealth funds include Algeria and Bahrain; collectively these institutions have hundreds of billions of dollars in assets, and any changes in their investment policies or mandates could be felt widely.

Sovereign wealth funds tend to have longer-term investment horizons than other types of investor and generally do not have to meet liabilities in the same way that a pension fund or insurance company, for example, has to. SWFs are thus often better equipped to commit more significant proportions of their portfolios to longer-term and alternative investments.

Despite the slow but steady return of institutional investor confidence, fundraising for many types of alternative investment has remained relatively depressed. For this reason, and given the difference between the investment objectives of sovereign wealth funds compared to other types of investor, SWFs represent an important and large potential source of capital for alternative investment managers. As predicted by Preqin last year, more sovereign wealth funds diversified into alternative investments over the course of 2010. 56% of sovereign wealth funds are known to invest in real estate, while a further 5% are considering making real estate investments. This is an increase from the proportion in 2010, when 51% of sovereign wealth funds were invested in the asset class. The sovereign wealth funds that invest in real estate have an average target allocation of 8.3% and an average current actual allocation of 7.1% to the asset class.

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