Challenging times for Gulf SWFs.

Author:Ford, Neil
Position:FOCUS - Sovereign wealth funds


Sovereign wealth funds (SWFs) have experienced widely fluctuating fortunes over the past three years. Most had shares in North American and European banks that were badly affected by the global financial crisis but SWFs around the world recovered strongly to record combined assets under management of almost $4 trillion at the start of this year. At the same time, the continued impact of the economic crisis in some European states is creating opportunities for new acquisitions.

Some countries, such as Russia, use their SWFs to balance their finances in the short term but most of those in Gulf can afford to take a long-term view. The Gulf SWFs are generally fed by revenues from oil exports, with the aim of smoothing out the impact of oil price fluctuations and also of ensuring that future generations benefit from the current oil boom. Some now invest in renewable energy companies and other sectors that could benefit at the expense of the oil industry, in order to reduce their risk exposure.

The $4 trillion figure comes from a recent report by investment research company Preqin, which calculated that the combined assets under management of the world's SWFs had increased by 11% during the course of 2010, from $3,590 billion to $3,980 billion. Preqin's 2011 Sovereign Wealth Fund Review concluded that the influence of SWFs would increase over the next five years, in contrast with more pessimistic results collated in similar pension fund surveys.

This figure appears accurate, given that TheCityUK estimated global SWF assets at $4.2 trillion in March. The financial services body also predicted that rising demand for natural resources would benefit sovereign funds and boost their combined assets to $5.5 trillion by the end of next year. TheCityUK expects the City of London to attract a large proportion of Gulf SWF investment, particularly as funds from Kuwait and the UAE have set up offices in London.

Sam Meakin, the managing editor of the Preqin report, said: "We expect the proportion of SWFs moving into the various alternative asset classes, as well as the amount invested by sovereign wealth funds in alternatives, to continue to increase in the coming year." He added: "Following global economic stabilisation, many sovereign wealth funds that had delayed plans to diversify their holdings as a result of the economic downturn have now resumed these plans."

The main trend in investment strategy appears to be an increase in the...

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