Time for SWFs to bring the money back home

The job of the SWFs has traditionally been to protect the capital accumulated by government policy. Protect, notice, not enhance or increase.

If you, dear reader, were a multibillionaire, what would you do? Sit back in the sun and live off the interest of your billions? Or actively go out to manage those billions to produce yet more billions?

It’s a question that gets to the root of the moneymaking system under which we all live. Many entrepreneurs-made-good, such as Richard Branson and Bill Gates for example, take a back seat once they have achieved their fabulous levels of wealth. Maybe spend more time on charity, maybe just take a rest and look back with satisfaction on their achievement.

But they seldom take an active role in the businesses that made them their fortunes, preferring to leave that to professional managers.

The world’s sovereign wealth funds (SWFs) are similar. They have billions, made either through the exploitation of a natural resource they were fortunate enough to find within their national boundaries (like most Middle East SWFs), or though the sheer hard work of the people of their sovereign territory (like the SWFs of China and Singapore).

It’s important to note, though, that the SWFs are not identical to the billionaires referred to above. They are not, initially at least, the wealth creators like Branson or Gates. That role is played by the governments and policymakers of the sovereign countries involved, which displayed the foresight, vision and sheer hard work to amass the funds in the first place.

The job of the SWFs has traditionally been to protect the capital accumulated by government policy. Protect, notice, not enhance or increase. The idea is to make sure the capital doesn’t get wiped out in a market crash, or embezzled by an unscrupulous administrator, or blown on inappropriate expenditure.

At least until the market crash of 2009, SWFs saw themselves as custodians rather than investors. That is why most of their billions were invested in safe and secure, tried and tested areas such as American and European fixed-interest instruments, with a small portion put into developed markets equities to give the odd thrill. Investment in non-developed markets was small, and minuscule in alternative (ie non-bond and non-equity) investments. All safe as houses, as the British misleadingly say.

During and for the couple of years after the crash, the same risk-averse attitude dominated the investment thinking of most SWFs. In most areas, it proved to be a wise call, as western bond and equity markets recovered sharply from the depths of 2009.

But over the past couple of years, that has began to change. Volatile global bond markets, fluctuating equity indices and uncertain commodity markets have led the SWFs, especially in the Middle East, to begin to think again.

A recent report by international accounting firm KPMG concluded: “There has been a shift in how regional SWFs have allocated their resources. The changes are driven by market forces, including the unprecedented low-interest rate environment … SWFs are viewing the west with caution and as a result have invested less internationally than they have in the past, while directing a portion of their funds back into the Middle East.”

Translated, that means the man in the sun has woken up to realise that his investment in euro-zone securities has actually performed rather badly. At the same time, the convulsions of the Arab Spring have shown him that a bigger portion of his billions would be better used back home.

So the allocation by SWFs to alternative investments, and to non-western mainstream investments, has increased. Asian bond and equity markets have benefited, as has the private equity industry. But the big earner has been real estate in those parts of the world – New York, London, Paris – deemed, rightly or wrongly, to be resistant to market fluctuations.

All that is good, and shows that the man in the sun is beginning to think about making his money work for him, rather than just living off the “rent” it produces.

Personally, I’d like to see a greater recognition by SWFs in the region that the Middle East has unique and pressing investment needs, in the areas of infrastructure and social fabric, such as education and health care.

Bringing the money back home, for the long-term benefit of citizens and stakeholders, is surely the main goal.


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Published: November 25, 2014 04:00 AM


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