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Gulf SWFs to focus on local investments
(Issac John) / 24 May 2011
DUBAI — The Gulf region’s sovereign wealth funds, or SWFs — which account for 44 per cent of global SWF flows, representing just over $1 trillion — are stepping up their domestic investments in the wake of the Middle East unrest, leading asset management company Invesco said on Monday.
Invesco’s latest study suggests geo-political drivers could prompt GCC-based SWFs to shift to more locally-focused investments and balanced-equity investment.
Dispelling the myth about the prevalence of international “trophy asset” investing by GCC based funds, the study, which shed light on the complex investment behaviour of SWFs, said six per cent of GCC SWF assets are now focused on local development investments.
While 88 per cent of the assets are invested internationally for diversification purposes, Gulf-based funds invest just five perent in trophy assets to drive foreign or local policy outcomes.
Gulf sovereign funds are expected to bring in a total of nearly $134 billion this year after suffering losses of some $90 billion in 2008, the International Institute of Finance, or IIF, said last month.
IIF estimates that the Abu Dhabi Investment Authority, the Kuwait Investment Authority, the Qatar Investment Authority and the Oman Reserve Fund will collectively constitute $768 billion in wealth by the end of the year. Adia is expected to gain the most with a total growth of almost $81 billion.
The world’s 10 largest SWFs hold $2.2 trillion in assets and invest around half that figure in international equity markets, according to a recent Investor Responsibility Research Center Institute and RiskMetrics Group survey.
Nick Tolchard, head of Invesco Middle East, said 88 per cent of sovereign wealth fund assets are invested for diversification purposes. The objective is to diversify country assets away from oil dependence, preserving wealth for future generations.
“The ‘public perception of sovereign wealth funds is that they invest heavily in international trophy assets, this shows that it simply is not the case with only approximately five of SWF assets now going that way,” said Tolchard.
“The current uprisings in Egypt and other Arab countries have driven greater local and regional allocations by some state entities which could justify short-term reclassifications from ‘diversification vehicles’ to ‘development agencies’,” he said.
Invesco estimates that 54 per cent of Gulf SWF assets are now held in developed market investments with the highest exposures to North America (29 per cent) and to Western Europe (19 per cent).
“We are now identifying a growing trend towards more developed markets, as investors seek new and possibly more fruitful investment opportunities in undervalued developed markets. However, an important nuance is that it is a case of there being more money on the table to invest in developed markets, rather than investors moving out of emerging markets,” said Tolchard.
He said SWFs are in fact becoming more discerning over their emerging market investments and taking a more sophisticated approach. “We are seeing many looking for specific emerging market opportunities such as Turkey and India, rather than broad-based investment in BRIC or global emerging markets.”
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