If you haven’t read about SWF’s lately, you’ve been missing the juicier parts of the financial press. I guess when general interest newspapers in the U.S. need to goose their circulation, they go for celebrity gossip, alien abductions, or Roger Clemens’ contract. When financial papers need to goose their circulation they trumpet the latest large numbers. How about $2.5 trillion and growing at 500 billion per year? That’s more than the $1.6 trilliion in hedge funds… and that’s what Morgan Stanley has estimated for SWF’s. What’s an SWF?
A Sovereign wealth fund (SWF) is a fund owned by a country (usual its central bank) composed of financial assets such as stocks, bonds, property or other financial instruments. SWFs differs from foreign exchange reserves by maximizing long term return and are not created or used for short term currency stabilization.
In other words, our friends in China have grown restive with their investment in US Treasuries and want more. (They already have currency reserves invested in primarily UST and MBS well in excess of what most economists believe they might need for currency stabilization.) Their most recent, high profile investment was in the private equity firm, The Blackstone Group
And, it’s not just China. Here’s an overview:
|Country||Fund||Assets, $bn||Inception year|
|UAE||Abu Dhabi Investment Authority||875||1976|
|Singapore||Government of Singapore Investment Corporation||330||1981|
|Saudi Arabia||Saudia Arabian funds of various types||300||na|
|Norway||The Government Pension Fund of Norway||300||1996|
|China||State Foreign Exchange Investment Corp. + Central Hujjin Note 1||300||2007|
|Kuwait||Kuwait Investment Authority||70||1953|
|Australia||Australian Government Future Fund||40||2004|
|US (Alaska)||Alaska Permanent Fund||35||1976|
|Russia||Stabilization Fund of the Russian Federation||32||2003|
|Brunei||Brunei Investment Agency||30||1983|
|South Korea||Korea Investment Corporation||20||2006|
Note 1: Not yet finalized. Source: Morgan Stanley(2007).
It’s good to be the popular kid on the block, with the World’s reserve currency, a stable government and legal structure ,and the largest military in history to protect it. However, how good is it when those other kids are buying parts of your house with the dollars you paid for their baseball cards and chewing gum? And, those other kids are under no obligation to tell anyone (not even their parents) what they are buying.
This is all fodder for the financial press to moan and grown about how the U.S. is selling itself to foreigners (true). But, we should not miss a key point for insurance company investment practices. If this trend continues (and it does not look like it will halt any time soon), we will see equities (and especially large cap U.S. equities) become more popular and good old fashioned US Treasuries become less so.
Here’s what the Financial Times’ Alphaville Blog (http://ftalphaville.ft.com/blog/2007/05/25/4789/sovereign-wealth-funds-and-the-2500bn-question/?source=rss) said about this trend:
The International Monetary Fund recently cited estimates that central bank buying has depressed yields on long-term US Treasury bonds by between 30 and 100 basis points as prices have risen. If buying eases, bond yields could rise and prices fall – and a greater share of new reserve accumulation will flow into non-bond assets.
Yes, we’ve benefited from a strong MBS market as foreign buyers have allocated more USD to this asset class in recent quarters, but where will they go next? And, how will that impact your company’s portfolio strategy?
I don’t think you can consider an asset allocation strategy without an estimate of what the growth of SWF’s, Hedge Funds and Private Equities will do to the investment landscape and risk/reward expectations.
Join in the discussion on this topic by going to the Insurer Investment Forum Online (www.saai.com/forum). I look forward to your comments.