Oct 20 2013
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Global SWFs' combined portfolio rises to USD6trn
Global sovereign wealth funds now hold more than USD 6 trillion in investments with Middle East funds contributing 35% of the assets, according to latest data from Sovereign Wealth Fund Institute.
Collectively, the funds' assets have risen by more than USD 1 trillion in nine months, suggesting that the richest fund continue to find investment opportunities in a low-growth economic environment.
The SWF Institute data from 73 funds, however, is around USD 600 billion higher than estimates by Preqin Sovereign Wealth Fund Review, which recently pegged the SWFs' combined assets at USD 5.38 billion.
The huge discrepancy in figures underlines the lack of transparency among sovereign wealth funds.
Critics argue that opaque sovereign funds are hurting not just transparency in public markets but also giving rise to corruption, embezzlement and misspending of what are ultimately the assets of the citizens of a country.
Revenue Watch Institute, a watchdog focused on governance and transparency issues in the management of natural resources wealth, notes that only 20% of the 58 countries it surveyed has adequate standards of transparency and accountability.
"Even countries with generally satisfactory standards exhibit weaknesses in some dimensions," the institute said in its latest Resource Governance Index.
"There is a major governance deficit in natural resources around the world, and the deficit is largest in the most resource-dependent countries, where nearly half a billion people live in poverty despite that resource wealth. Fortunately, some countries, including several emerging economies, show that satisfactory performance in resource governance is possible."
Middle East nations found themselves in the bottom-half of the RWI's list with Libya, Qatar and Iran among the most opaque countries when it comes to governance of their natural resource assets.
The International Forum of Sovereign Wealth Funds (IFSWF) - a group of 25 member states including the UAE, Kuwait, Qatar, Bahrain and Iran -- is trying to address the issue of transparency.
The forum aims to outline an accounting framework that complies with international standards, under the so-called 'Santiago principles', focused on 24 generally accepted accounting principles (GAAP).
The forum's latest report published on October 3 on the sidelines of its annual event in Oslo, Norway, highlighted the SWFs' progress (or the lack thereof) :
· 13 of the 21 respondents have fully implemented all 24 GAPPs of the Santiago
Principles (compared to 10 members in 2011);
· Generally, there is a high degree of compliance with GAPPs 1-5 addressing the legal framework, objectives and coordination with macroeconomic policies;
· Institutional framework and governance structure are largely consistent with GAPPs 6-9, and accountability frameworks have improved (GAPPs 10-17); and
· More members are developing their investment and risk management framework to contribute to financial stability and meet generally agreed asset management practice (GAPPs 18-24)
Despite their lack of transparency, most of the funds have managed to perform extremely well and have allowed ample fiscal cushion for their governments.
"Interestingly, Asia-based sovereign wealth funds have shown some of the largest growth in assets under management, with the assets of these sovereign wealth funds growing, on average, by 19% since 2012," said Preqin in its report.
"This is in comparison to the average 6% growth in assets under management exhibited by Middle Eastern sovereign wealth funds. In fact, Asia-based sovereign wealth funds account for a significant 47% of global aggregate sovereign wealth fund assets, despite only representing 22% of sovereign wealth funds globally by number."
Middle East funds seemed especially focused on real estate investments.
Preqin notes that MENA-based sovereign wealth funds show the greatest appetite for private real estate investments with 81% of the funds invested in the sector, compared to 75% of Asia-based SWFs.
This is evident in their heavy real estate investments recently. Middle Eastern capital in real estate almost tripled to USD 2.8 billion in the first half 2013, from USD 991 million in the first half of 2012.
"Key players were once again sovereign wealth funds from Qatar and Abu Dhabi which have continued to deploy capital in core European markets," said real estate consultants Jones Lang Le Salle in its latest report on institutional real estate investment.
Indeed, sovereign wealth funds, from Qatar and Abu Dhabi in particular, have been scouring the globe for trophy assets, with the average size of such deals completed in the first half of 2013 standing at USD 630 million, the real estate consultancy noted.
While there has been a concerted effort lately in the region to invest in domestic markets, the sheer nature of sovereign wealth funds is to invest away from their immediate market and diversify their revenue streams.
And with oil prices at historically high levels, the funds are expected to bulk up more in the medium term.
The US Department of Energy notes that OPEC countries are expected to generate as much as USD 788 billion in oil revenues this year, which will need to be channeled into the domestic economy and reserve funds.
Last year, OPEC countries earned USD 835 billion, and they can expect another USD 744 billion windfall in 2014, that will need to be allocated.
Indeed, more countries are eyeing the sovereign wealth fund route to manage their wealth. An IMF survey of 156 central bank reserve managers in May showed that at least 15 fund managers were looking to create a sovereign wealth fund.
"Reserve managers believe that they can adopt a number of initiatives to limit the adverse impact of potential risk factors, with a preference for the use of more hedging instruments, but a large minority is considering more fundamental solutions," said the IMF.
"Nearly one-quarter of respondents feel that reducing the outright level of reserves would be beneficial to reduce risk factors. One in 10 reserve managers are considering creating Sovereign Wealth Funds (SWFs) or shifting balances to SWFs."
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