Mideast sovereign wealth funds ready for challenges

Issac John/Dubai
Filed on September 27, 2015 | Last updated on September 27, 2015 at 07.53 am
Mideast sovereign wealth funds ready for challenges

Region's funds exhibit strong demand for emerging markets across asset classes.

The plunge in oil prices is expected to reduce funding and increase withdrawal risk, but Middle East sovereigns, which control more than one-fourth of the $7.09 trillion global sovereign wealth funds, or SWFs, are now better-placed to manage these challenges than in the past.

Established Middle East sovereigns have concerns over withdrawal and funding risk  but also feel they are better placed to cope with the challenges than before the global financial crisis, investment management firm Invesco said in a recent study.

Know your funds: The UAE's SWFs

. Abu Dhabi Investment Authority

. Abu Dhabi Investment Council

. Investment Corporation of Dubai

. International Petroleum Investment Company

. Mubadala Development Company

. Emirates Investment Authority

The Sovereign Wealth Fund Institute ranks the Abu Dhabi Investment Authority as the second-largest source of SWF in the world at $773 billion, just behind Norway's $900 billion.

Nick Tolchard, head of Invesco Middle East, said emerging-market infrastructure is a key sub-asset class for established Middle East sovereigns and they are keen to expand sovereign and private sector relationships to ensure access to attractive deals.

Invesco said in its report that in emerging markets, infrastructure investment helps sovereigns manage investment risk. Demand for infrastructure is increasing and changing the nature of sovereign collaboration. Middle East SWFs, which account for $1.94 trillion of the total global sovereign funds, exhibit strong demand for emerging markets across asset classes. They currently allocate more to emerging markets because they are more comfortable with the country and shareholder protection risk, Invesco said.

"This is partly as a result of the Middle East's emerging-market status and partly due to the track record of Middle East sovereigns who have been investing into these markets for many decades. The demand from Middle East sovereigns to increase emerging market exposure is now a five-year theme which has continued through periods of underperformance and high levels of volatility in emerging market indices," the report said.

However, with the relentless fall of oil prices by more than 50 per cent, governance and stability have become key concerns for Middle East sovereigns.

The price of oil and Middle East government revenues have remained relatively low and the US Energy Information Administration expects the price per barrel of West Texas Intermediate crude oil to remain below $67 throughout 20161. There is also consensus among participants in the Invesco study that Middle East governments will struggle to cut expenses, given high welfare expectations from Middle East locals and underlying political instability in the wider region.

Invesco argues that as a result of these factors, Middle East sovereigns have more concerns over stability and governance than sovereigns in other regions. "Stability and governance appear to be a greater challenge for Middle East sovereigns than for peers in international markets. These concerns are driven by oil price falls and the view that withdrawals will justify conservative strategies within sovereigns and reduce reform. Specifically, participants in our study noted that the likelihood of adopting new investment strategies and benchmarks, increasing risk asset exposure or reviewing internal asset management strategies had reduced as a result of the oil price fall," the report said.  

According to the Sovereign Wealth Fund Institute, the size of the SWFs in the region is much higher. The  GCC states alone have amassed some $2.67 trillion at the start of 2015, comprising 37.6 per cent of global SWFs. The UAE alone controls 15.2 per cent with SWFs of $1.07 trillion. The UAE's SWFs comprise the Abu Dhabi Investment Authority, the Abu Dhabi Investment Council, Investment Corporation of Dubai, International Petroleum Investment Company, Mubadala Development Company and the Emirates Investment Authority.

The Sovereign Wealth Fund Institute ranks the Abu Dhabi Investment Authority as the second-largest source of SWF in the world at $773 billion after Norway at $900 billion and ahead of Saudi Arabia's $757 billion fund in third position.


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