Sovereign funds change tack

Sovereign wealth funds are making smaller but more numerous investments and shifting focus increasingly to emerging markets, according to a new report from the Monitor Group in London.

The Qatar Investment Authority last year purchased the London department store Harrods for $2.2 billion. Stephen Lock / The National

Sovereign wealth funds are making smaller investments in larger numbers and continue to shift focus from developed markets to the emerging world, according to a new report on fund activity last year.

Overall, publicly reported investments by sovereign funds were worth US$52.7 billion (Dh193.56bn) last year, a decline of 23 per cent compared with 2009, according to the third annual report by the Monitor Group in London on state-owned investment vehicles. At the same time, the number of reported investments almost doubled to 172.

The trend reflected that funds were developing more in-house investing expertise and were being pushed by governments to deliver better returns, said Victoria Barbary, a senior analyst at the Monitor Group who edited the report with Bernardo Bortolotti, a professor of economics in Italy. That trend is continuing this year, she said.

"[External] asset managers have a role to play, but ultimately that's not the whole answer," Ms Barbary said. "They need to be more proactive. You'll still see them using asset managers, but there is definitely a trend for them developing their own capabilities."

The Gulf is home to some of the world's biggest sovereign wealth funds, which manage and invest excess oil revenues abroad. The Abu Dhabi Investment Authority is the second-largest such fund in the world, according to the Monitor Group, with holdings worth an estimated $342bn. The largest is Norway's Government Pension Fund, with assets worth $560bn.

Other major sovereign funds in the Gulf include the Qatar Investment Authority (QIA) and the Kuwait Investment Authority. Globally, dozens of countries from China to Singapore and Russia maintain sovereign wealth funds.

The biggest fund investments last year from the Gulf included the International Petroleum Investment Company of Abu Dhabi's 4.99 per cent stake in Italy's Unicredit for $2.3bn and the QIA's purchase of the London department store Harrods for $2.2bn. The QIA also bought 5 per cent of Veolia, the French utilities company, for $868 million.

But the year was marked by smaller stakes, including investments in "Vietnamese banks, Zambian telecoms, South African platinum mining and a tourist resort in Jordan", the Monitor Group report said. "It was these deals, rather than the prestige investments in Europe and North America, that set the tone for the rest of the year, as [sovereign funds] slowed their direct investments in the [countries of the Organisation for Economic Co-operation and Development]".

While funds focused on smaller investments, they also concentrated on emerging markets, and especially on fast-growing Asian countries. While Europe had been a big target for investment in the previous two years, last year $25.2bn of reported investments went to the Asia Pacific region, representing about half the value of all investments. China, India, Singapore, Indonesia and Malaysia all enjoyed a "large influx" of sovereign investment, the report said. Latin America was also starting to become a more popular destination for sovereign fund investment.

That shift comes on the heels of a longer-term movement of economic might away from developed western economies and towards the emerging world. Investors have paid increasing attention to opportunities in China, India, Brazil and Russia as they enjoy rates of GDP growth that are the envy of developed-world counterparts.

Another theme last year, according to the report, was a renewed interest in commodities and financial services companies.

Direct investments in financial companies fell off a cliff in 2009, but sovereign investments in the sector rebounded in a big way last year with 50 purchases involving banks, insurance companies and trading firms worth a collective $20.4bn accounting for almost 40 per cent of the value of all publicly reported transactions during the year.

Since putting up billions of dollars to help western banks, including Barclays and Citigroup, during the worst stretch of the global financial crisis, the report said funds had "generally shied away" from financial companies, but "seemed to regain their appetite" last year.

Commodities and alternative investments, meanwhile, "will become increasingly important" for funds, the report said.

"Returns on many traditional asset classes are currently depressed and seem likely to remain so, particularly developed market equities and government bonds," the report said.

"With [funds] keen to make good returns for their sovereign government owners, it may well be that they choose to increase their allocation to alternatives as they look to realign their portfolios with new economic realities." [e-mail]