Business

Sovereign funds turn to home

Sovereign wealth funds are redeploying their cash from glitzy investments in the West to local economies, finds a study by Invesco Middle East Asset Management.

Tom Arnold

May 22, 2012

GCC sovereign wealth funds are investing less globally than they have done at any point in the past three years, according to a study of regional wealth fund investment patterns by Invesco Middle East Asset Management.

The cash is instead being redirected into local economies as spending surges in public wages, infrastructure, health care and education, the study found.

"The story this year is that it is no longer a given that large sovereign governments are going to direct their oil revenue surpluses around the globe, pumping cash into other global economies," said Nick Tolchard, the head of the Middle East at Invesco.

As the West struggled during the global financial crisis, the deep pockets of the region's sovereign funds snapped up an array of low-valued assets. Abu Dhabi's Aabar Investments' purchase of a 4.9 per cent stake in UniCredit, Italy's largest bank, and Qatar Holding's £1.5 billion (Dh8.7bn) purchase of the luxury London store Harrods in 2010 were among the eye-catching deals.

Such investments have since thinned out.

"There will be contestable assets for fund managers in core relevant markets but with more money being deployed into the local economies, it is likely to be a much more competitive landscape as long as the unrest continues," said Mr Tolchard.

Less cash from GCC governments was being pumped into sovereign funds, the study said.

On the other hand, funding for sovereign pension funds had risen to 13 per cent this year from 8 per cent last year, it estimated.

Most GCC members have raised wages and pensions for public-sector workers this year.

Reflecting the trend, the study showed more cash was being deployed closer to home.

Last year, 54 per cent of GCC sovereign funds were invested in developed markets, with 29 per cent of exposure in North America and 19 per cent in western Europe.

This year, North America has accounted for 14 per cent of investment, with continental Europe down at 4 per cent.

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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