Investment

21 August 2008

Reader writes :

I have heard quite a bit about sovereign wealth funds (SWF) and how they may be affecting the economy and market. Is there much truth in this? 

Managing Director, Worldwide Financial Planning Writes: 

I suppose like everything there is no smoke without fire. Firstly what is a SWF?

Many countries have made vast amounts of money over the years and they simply want to make the best returns for it. Unlike some, closer to home who spend and borrow, others have been successful in achieving considerable wealth via the sale of their assets. I am writing this column in Norway, a country proud of the fact its government has saved for the future. Norway, with its oil and fishing to name two simple examples, has amassed 380 billion dollars. (1) It isn’t the biggest as the United Arab Emirates is estimated to pip Norway into second place with a healthy 875 billion.

The motivation of the funds is all very different. For Norway, they see it as a pension fund. Russia's is a stabilisation fund against high energy prices. China and South Korea however, want the best returns and access to resources for their developing economy so they buy into companies that will give them that.

Much has been learned from the golden Guano: In Kiribati, a Pacific island, they mined this fertiliser. Realising this asset would not be around forever, they invested the proceeds. Today, the Guano is no more, but the returns on its 400m dollar fund boost the economy by a sixth. Nice move. The Norwegians here are very content their government is being similarly sensible.

Governments who own SWFs simply know that to invest their hard earned cash at home would mean they risk driving domestic inflation upwards and so they venture abroad.

Consider that if you owned a wellington boot company, would you want therefore separately to invest your gains in wellington boot companies or umbrella manufacturers for that matter?

Hardly. A government makes large domestic gains and simply wants to diversify their risk by buying ice cream companies, to continue with the example.

There is little evidence of any aggressive moves by SWFs. In fact the only one that is visible is by the Norwegians a couple of years back. Realising the Arctic boom was probably at an end they started to sell short Icelandic banks (basically they were betting that the banks would fall in price). This had a considerable impact which was not enjoyed in Reykjavik.

Perhaps the biggest concern that has people worried is the opacity of SWFs. Norway’s has opted for full disclosure whilst the others have not and you cannot easily see what they are invested into.

That could be a concern as the International monetary fund believes the total value will be over 10 trillion dollars by 2012. (2)

However recent evidence suggests that there is little to be concerned about:

Sovereign wealth funds' strength is undermined when you see that they only account for 2% of the total world's traded securities although they have more equity than private equity and hedge funds. (2)

Indeed some of their decisions cannot really be seen as aggressive as they have bailed out many of the larger banks. Concerns over whether or not they have the ability to move markets can be evidenced on some recent purchases.

Was Barclays a good investment for a SWF at near 700p or would it have been better to wait until its price hit this year's all time low of 238p. (3) The massive investment didn’t support the price and the Chinese SWF that paid 3 billion dollars for its stake in Blackstone which is now worth closer to 2 billion is another example of its lack of ability to force a stock or market. Indeed any scares are further diminished when you see that the largest SWF is actually run and managed by European and English investors who are investing as we would.

With so much money awash there is still the need for a closer scrutiny of their actions and regulation is inevitable.

If you have an investment query call Peter on 0800 0112825 or e-mail info@wwfp.net

Sources:-
¹ Morgan Stanley
² The Economist
³ London Stock exchange


Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
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