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Mideast SWFs tide over oil price dip

Regional sovereign funds seek highest average target returns and longest time horizons

Dubai - The Middle Eastern sovereigns, who control more than one-fourth of the $7.09 trillion global sovereign wealth funds, have the highest average target returns and the longest time horizons at an average of 7.8 years.

Invesco, an investment management firm, said in a study released on Wednesday that sovereign investors, including those in the Middle East, are in a stronger position to manage funding and concerns over withdrawals resulting from low oil price.

“However, they might face increased withdrawal risks if the oil prices were to remain below $40 per barrel for more than two years,” said Nick Tolchard, chair of Invesco’s Global Sovereign Group and head of Invesco Middle East, at a media briefing.

While the outlook for regional funds is quite positive as their governments seek long-term returns or domestic development, the flipside is that more than a third of Middle Eastern sovereign wealth funds, SWFs, expect new funding to decrease as the region adjusts to a period of lower oil prices.

Another key finding of the survey among 59 individual sovereign investors across the globe is that increasing demand for emerging market infrastructure investment opportunities is proving to be a catalyst for sovereign collaboration.

“The Middle East region placed the highest importance on investment objectives, overtaking the Western sovereigns. Similarly, the Middle East sovereigns had the highest average target returns and the longest time horizons at an average of 7.8 years. Such findings place the Middle East funds in a unique place amongst sovereign investors,” Tolchard said at the launch of Invesco Global Sovereign Asset Management Study.

The Middle East accounts for $1.94 trillion of the total $7.09 trillion for global sovereign investors that participated in Invesco survey, Zainab Faisal Kufaishi of Invesco Asset Management, said quoting NMG Consulting. However, the figure is much higher, according to Sovereign Wealth Fund Institute, which says 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 SWFs comprise Abu Dhabi Investment Authority, or Adia, the Abu Dhabi Investment Council, Investment Corporation of Dubai, International Petroleum Investment Company, Mubadala Development Company and Emirates Investment Authority.

The Sovereign Wealth Institute ranks 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.

The study examines how investment strategies are evolving — both in terms of preferred asset class, notably for emerging market infrastructure, and execution strategy — as collaboration becomes increasingly frequent to access investment opportunities.

Some respondents expressed concern that the fall in oil price may result in a short-term reversal to more conservative investment strategies and defer the implementation of more progressive long-term allocation trends towards alternatives. Despite this, it remains clear that sovereign investors feel they are in a much stronger position to deal with the impact of falling oil prices this year than they would have been in 2008.

“Should the oil price continue to remain low, we expect many sovereigns to focus their efforts on ensuring that progress around the implementation of more progressive investment strategies towards alternative investments isn’t deferred,” said Tolchard.

He noted that in the current environment, sovereign investors remain hungry for returns and are developing their long-term investment strategies accordingly — including looking increasingly at alternatives.

The study found that a general attraction of sovereigns to emerging market infrastructure was been driven by two specific drivers. First, emerging market infrastructure is perceived as a low-risk entry into emerging markets. Second, the supply and demand dynamics in emerging markets are more attractive to sovereigns than both developed market infrastructure and different classes of emerging market alternative investments.

Sovereign investors are united in collective challenges for both infrastructure and real estate investments — namely cost and competition.

“The trend in sovereign collaboration was observed in our 2014 findings; however in 2015, this collaboration appears to be taken further by certain sovereigns who are developing infrastructure propositions specifically to target other sovereigns,” said Tolchard.

— issacjohn@khaleejtimes.com