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The allure of sovereign-wealth funds
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Imagine a Nigerian Sovereign Wealth Fund aggressively foraying overseas with $30 billion (N3.51 trillion); the money would be half of the external reserves-buying into Merril Lynch, taking sizable stake at Citigroup, US banking giant or even putting in a bid at Northern Rock, buying into some foreign equities and other liquid assets.
The world would not only pay attention to the country’s talk of becoming a global giant by 2020, it would be more willing to put up infrastructure that will sustain their interest in the country like the Dutch did in the South Africa at the turn of the 19th century.
The situation is presently ideal. The country has little or no international debt. It has a huge foreign reserve chest and oil prices are rising daily.
Indeed, the Sovereign Wealth Funds (SWFs) has become 21 century investment theme for both developed and developing economies. Countries like Libya, Egypt, China and a host of others are deploying this huge pool of funds as part of a strategy to manage aggressively a portion of their rising foreign reserves.
Some of the funds, if not all behave as capitalists bent on making as much money as they can. Others may have “strategic” goals—to nurture national champions or to galvanise national development.
Some are held solely by central banks, who accumulate the funds in the course of their fiscal management of a nation’s banking system; this type of funds is usually of major economic and fiscal importance.
Morgan Stanley, Global financial services firm and a market leader in securities, asset management and credit services, calculates that the total size of the SWFs could reach $12 trillion by 2015, and would surpass the size of the worlds total official reserves within five years.
At that rate of growth, the funds will probably still account for less than 3 percent of global traded securities.
At present, SWFs derived from oil and gas exports accounts for some two-thirds of total SWFs. Analysts envisage a rapid growth in size of the funds and in diverse ranges with interests spread more in strategic companies that possess higher-tech in capabilities and techniques.
Many oil producing nations derive the state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments with the windfall from oil which has become too big to spend in one go at home without the risk of waste and inflation.
The traditional investment vehicles for sovereign wealth in the form of foreign currency reserves have been the debt instruments such as government bonds from the industrialized nations. The low returns on these investments, however, have prompted nations with excess foreign reserves to invest in equities to achieve a higher return.
Today, sovereign-wealth funds make up 2 percent of the world’s $165 trillion-worth of traded securities. Analysts reckon that they have a lot of firepower: more equity than private equity and more funds than hedge funds.
Research firms also reckon that the Gulf region’s big funds could add another $300 billion to manage this year alone.
The Abu Dhabi Investment Authority, of the United Arab Emirates, worth $875 billion, is the biggest. The list also includes the China Investment Corporation (CIC), which last year was sent into the world with $200 billion in its back pocket; and Alaska’s $38 billion Permanent Fund, based on the state’s mineral wealth.
In February South Korea’s sovereign wealth fund with just $ 20 billion under management shifted towards more aggressive oversea expansion with $2 billion investment in Merril Lynch.
By the end of 2007, it had invested $14.8 billion of the $20 billion that has been commited, into fairly safe assets. 70 percent of it was placed in fixed income assets. Nigeria could be looking at exploring this option. In this respect the Central Bank of Nigeria (CBN) could begin with a small pool of fund, hire financial professionals, with the capacity to advise on diversified portfolio, to take it through the initial stages.
The South Korean example is modeled on the government of Singapore Investment Corporation and was intended to invest some of Korea’s $250 billion of foreign currency reserves in foreign equities and other liquid assets.
The influence of the funds today is underlined by the role they played in the wake of the subprime meltdown when much of the fund came to the rescue of big Western corporations that found themselves in the wrong end of the subprime hit.
Much of Wall Street was bailed out by state-backed investors from emerging economies.
Even Citigroup got the sovereign-wealth treatment, picking up $6.6 billion and $14.5 billion respectively, much of it from governments in Asia and the Middle East. Sapped by the subprime crisis, rich-world financial-services groups were administered nearly $69 billion-worth of infusions from the savings of the developing world in the past ten months, according to Morgan Stanley. The investments in Wall Street helped to stabilise the US banking system and allowed their banks to taken on large, friendly, long-term shareholders.
These funds have demonstrated capacity to positively influence prices and markets because much of the money is cast broadly across industries and economies. They can buy assets priced in any currency, including emerging-market currencies. The funds are interested chiefly in making money. They are big enough to shift markets using the full range of investment options, including hedge funds and private equity, which often covers their tracks.
A sovereign wealth fund (SWF) is an investment fund that is owned by a government (Wikipedia). The funds invested through such funds are usually the proceeds of non-renewable natural resources or a higher return alternative to holding foreign currency.
Expansion of sovereign wealth funds in recent years has been driven by:
rising East Asian foreign exchange reserves, and the need for oil rich countries to invest oil money to provide income to replace that from diminishing oil reserves.
The pioneer SWF was, in many ways, Singapore’s GIC. It is one of the first government owned portfolio investment funds.
Although there have been fund set up and run by governmental entities before the expansion of SWFs, these were different in various ways. For example there were many government pension funds (such as CALPERS), but these differed in that the proceeds belonged to pensioners, not governments. Central banks have long managed foreign exchange reserves, but these have been conservatively invested and aimed to provide liquid funds for crisis management and market intervention rather than good long term returns.
SWFs also differ from government funds that invest in their own country as these are usually driven by the desire to direct the economy in some way (for example by investing in industries whose growth will have some benefit for the broader economy) rather than being primarily aimed at generating high returns.
The rise of SWF investment across national borders has also caused some controversy with many of the major economies (rather hypocritically) worrying about large chunks of their economy being controlled by other governments.
The world would not only pay attention to the country’s talk of becoming a global giant by 2020, it would be more willing to put up infrastructure that will sustain their interest in the country like the Dutch did in the South Africa at the turn of the 19th century.
The situation is presently ideal. The country has little or no international debt. It has a huge foreign reserve chest and oil prices are rising daily.
Indeed, the Sovereign Wealth Funds (SWFs) has become 21 century investment theme for both developed and developing economies. Countries like Libya, Egypt, China and a host of others are deploying this huge pool of funds as part of a strategy to manage aggressively a portion of their rising foreign reserves.
Some of the funds, if not all behave as capitalists bent on making as much money as they can. Others may have “strategic” goals—to nurture national champions or to galvanise national development.
Some are held solely by central banks, who accumulate the funds in the course of their fiscal management of a nation’s banking system; this type of funds is usually of major economic and fiscal importance.
Morgan Stanley, Global financial services firm and a market leader in securities, asset management and credit services, calculates that the total size of the SWFs could reach $12 trillion by 2015, and would surpass the size of the worlds total official reserves within five years.
At that rate of growth, the funds will probably still account for less than 3 percent of global traded securities.
At present, SWFs derived from oil and gas exports accounts for some two-thirds of total SWFs. Analysts envisage a rapid growth in size of the funds and in diverse ranges with interests spread more in strategic companies that possess higher-tech in capabilities and techniques.
Many oil producing nations derive the state-owned fund composed of financial assets such as stocks, bonds, property or other financial instruments with the windfall from oil which has become too big to spend in one go at home without the risk of waste and inflation.
The traditional investment vehicles for sovereign wealth in the form of foreign currency reserves have been the debt instruments such as government bonds from the industrialized nations. The low returns on these investments, however, have prompted nations with excess foreign reserves to invest in equities to achieve a higher return.
Today, sovereign-wealth funds make up 2 percent of the world’s $165 trillion-worth of traded securities. Analysts reckon that they have a lot of firepower: more equity than private equity and more funds than hedge funds.
Research firms also reckon that the Gulf region’s big funds could add another $300 billion to manage this year alone.
The Abu Dhabi Investment Authority, of the United Arab Emirates, worth $875 billion, is the biggest. The list also includes the China Investment Corporation (CIC), which last year was sent into the world with $200 billion in its back pocket; and Alaska’s $38 billion Permanent Fund, based on the state’s mineral wealth.
In February South Korea’s sovereign wealth fund with just $ 20 billion under management shifted towards more aggressive oversea expansion with $2 billion investment in Merril Lynch.
By the end of 2007, it had invested $14.8 billion of the $20 billion that has been commited, into fairly safe assets. 70 percent of it was placed in fixed income assets. Nigeria could be looking at exploring this option. In this respect the Central Bank of Nigeria (CBN) could begin with a small pool of fund, hire financial professionals, with the capacity to advise on diversified portfolio, to take it through the initial stages.
The South Korean example is modeled on the government of Singapore Investment Corporation and was intended to invest some of Korea’s $250 billion of foreign currency reserves in foreign equities and other liquid assets.
The influence of the funds today is underlined by the role they played in the wake of the subprime meltdown when much of the fund came to the rescue of big Western corporations that found themselves in the wrong end of the subprime hit.
Much of Wall Street was bailed out by state-backed investors from emerging economies.
Even Citigroup got the sovereign-wealth treatment, picking up $6.6 billion and $14.5 billion respectively, much of it from governments in Asia and the Middle East. Sapped by the subprime crisis, rich-world financial-services groups were administered nearly $69 billion-worth of infusions from the savings of the developing world in the past ten months, according to Morgan Stanley. The investments in Wall Street helped to stabilise the US banking system and allowed their banks to taken on large, friendly, long-term shareholders.
These funds have demonstrated capacity to positively influence prices and markets because much of the money is cast broadly across industries and economies. They can buy assets priced in any currency, including emerging-market currencies. The funds are interested chiefly in making money. They are big enough to shift markets using the full range of investment options, including hedge funds and private equity, which often covers their tracks.
A sovereign wealth fund (SWF) is an investment fund that is owned by a government (Wikipedia). The funds invested through such funds are usually the proceeds of non-renewable natural resources or a higher return alternative to holding foreign currency.
Expansion of sovereign wealth funds in recent years has been driven by:
rising East Asian foreign exchange reserves, and the need for oil rich countries to invest oil money to provide income to replace that from diminishing oil reserves.
The pioneer SWF was, in many ways, Singapore’s GIC. It is one of the first government owned portfolio investment funds.
Although there have been fund set up and run by governmental entities before the expansion of SWFs, these were different in various ways. For example there were many government pension funds (such as CALPERS), but these differed in that the proceeds belonged to pensioners, not governments. Central banks have long managed foreign exchange reserves, but these have been conservatively invested and aimed to provide liquid funds for crisis management and market intervention rather than good long term returns.
SWFs also differ from government funds that invest in their own country as these are usually driven by the desire to direct the economy in some way (for example by investing in industries whose growth will have some benefit for the broader economy) rather than being primarily aimed at generating high returns.
The rise of SWF investment across national borders has also caused some controversy with many of the major economies (rather hypocritically) worrying about large chunks of their economy being controlled by other governments.
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