Sovereign wealth funds up for a challenging few years ahead!

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Jun 4, 2005
By Ng Baoying, Channel NewsAsia | Posted: 01 February 2008 1812 hrs

SINGAPORE: Up until recently, sovereign wealth funds are known for taking a more measured approach in their investment strategies.

But recent high-profile investments are suggesting to some market watchers that these funds are taking on a more aggressive bent.

But is this the start of a change in their investment profile?

Russia's sovereign wealth fund is one of the fastest expanding, almost doubling in size over a one-year period from September 2006.

But most of that growth has come from a jump in oil revenues.

As investment styles go, it's conservative, as it can invest only in sovereign bonds issued by governments in the US, and selected EU countries.

But that's about to change.

The fund will split into two in March, with one arm focused on aggressive investments into infrastructure projects in Russia, and global equities.

Peter Morgan, Asia-Pacific Chief Economist of Global Research, HSBC, said: "Given the very low returns on treasury bonds that you get these days it's quite logical that these SWFs take a more aggressive approach to manage these funds."

Ho Yew Kee, Vice Dean, Finance & Administration of NUS, said: “They would always like to invest in the most profitable venture. The sovereign funds, because of its size, has the opportunity to identify bargains and be able to invest in a significant manner to pick up good opportunities."

“Some major banks in the world are cherries for the picking. If the worst of subprime is over, some of these banks require recapitalization. These are banks that have been with us for a long time. This is a best chance for SWFs to invest in them. In other occasions they won't need money from SWFs," he added.

More recently, these funds have captured opportunities in the financial sector, pumping in billions in ailing banks.

But despite this seemingly more aggressive stance, some analysts noted that these funds are kept in check by a studied grasp of risk.

Benjamin Yeo, Executive Director, Asia Corporate Research Head of UBS Wealth Management Research, said: "Most of these SWFs are basically operating with a mandate pretty much like an investment company or asset management company. What they're looking for are returns with a calcluated risk profile.

Yeo continued: “They have been operating not just today. They've been around, look at investments not only in domestic markets but in global basis. Because these are investors, they're always evaluating situations in the global economy. Where they find value and return they will be putting their attention into it.”

Some of these funds, like Singapore's GIC, recognise the need to navigate their way past sinkholes and pitfalls at this period of slower global growth.

Dr Tony Tan, Deputy Chairman and Executive Director of Government of Singapore Investment Corporation, said: "We live in a very challenging world now. In the present economic environment there are a lot of uncertainties. We have to deal with a changing economic environment which may be very different from what we experienced in the last few years.”

“For GIC as well as for the other SWFs I think we have to make the right decisions as to what asset classes we have to invest in, which countries, how to protect against losses in foreign currencies. All of these are very difficult problems. I think it will be a testing and challenging time for GIC and all the other SWFs in the coming years," Dr Tan added.

Japan is one of the latest among a growing number of countries planning to set up a sovereign wealth fund.

And while it may be in vogue to seek good investment returns through such funds, some said that is no substitute for sound economic policies.

Gerard Lyons, Chief Economist, Global Research Group Head of Standard Chartered Bank, said: “A country should actually have credible macroeconomic policies and it should build up national savings. In the West the feeling is always up to individuals to build up individual savings. So governments in countries should set up a framework where macro economy is sound, country does successfully, in that taxes should be low and regulation should be light.”

Latest estimates put the number of sovereign wealth funds in the world at just over 40. -CNA/vm

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