Asian sovereign funds are biggest SWF spenders in 2009

Asian SWFs have overtaken Middle East government investment arms as the largest acquirers of assets this year, and the biggest increase in spending is in the natural resources sector.

There have been some major shifts in sovereign wealth fund (SWF) trends this year, one of which has been Asia-based institutions accounting for a higher share of the overall investments relative to those in other regions. Also notable is a sectoral shift towards natural resources assets, according to Barclays Capital.

The SWF sector, with its estimated $6 trillion in assets, has also put more of a focus on risk management and credit assets in their portfolios, says Gay Huey Evans, vice-chairman of investment banking and investment management at Barclays Capital. Based in London, she also heads up SWF coverage for the UK bank globally and was on a recent trip to Singapore to host the firm's SWF portfolio management training programme.

Last year, Middle Eastern funds accounted for around 54% of SWF investments and Asian SWFs 44%, says Huey Evans. But in 2009, an estimated 64% of investments have come from Asian institutions, while the Middle Eastern entities have accounted for 35% of transactions, according to Barclays' figures. The entities in question include central bank-like entities, diversified asset managers and strategic investors.

The three biggest investors this year have been China Investment Corporation (CIC), Mubadala Development Company and IPIC, the latter two based in the UAE. "But China really has dominated the landscape with the majority of transactions, mostly in natural resources," says Huey Evans.

Of the estimated $95 billion in strategic investments made by sovereign wealth funds in the year to October 31, the biggest chunk, $10.5 billion, came from CIC. "CIC, probably more than everyone else this year, has had a desire to strategically put its reserves into natural resources," says Huey Evans. At the end of September, for example, CIC bought a $1 billion stake in commodity trading group Noble Group, and it has taken shares in various oil companies over the past year.

Meanwhile, of the total estimated $95 billion in investments, 60% were in natural resources, 16% in financial institutions, 10% in industrials and 10% in real estate. That compares to $130 billion of investments made in 2008, 48% of which were in financial institutions, 24% in real estate, 12% in industrials and 8% in natural resources.

There has been a clear switch into natural resources, away from both financial institutions and property, says Huey Evans. SWFs in the past year have built up exposure to commodities either through buying futures, making loans in exchange for supply agreements or investing directly in companies, she adds.

"We've also seen quite a bit of interest in agricultural commodities, particularly in the Middle East; in securing food supplies," says Huey Evans. "That's not easy to do. And they've also talked about how to access water, which is at a premium in the Middle East."

There's been a continued move away from traditional fixed income to encompass other asset classes, she adds; they have sought training on everything from mortgage-backed securities to hedge funds to private equity, across the whole range.

Another trend is a greater emphasis among SWFs on risk management. They have actively hired specialist risk managers in 2008 and 2009, says Huey Evans, and -- like other asset managers -- they've been looking at how to create a more holistic framework for measuring risk.

"As they are long-term investors, most of them are not concerned about losses in the short run, as long as they believe they have the right asset-allocation model in place and the right assessment of risks," she adds. "So they've done a lot of soul searching to make sure they have the risk approach across the organisation."

Barclays Capital's training course is designed not only for SWFs, but also central banks, government pension funds and so on. Participants at the Singapore event in late October came primarily from Asia, with some from Russia and the Middle East.

Asked whether concerns remain over the investment motives of such entities among politicians, industry and banking leaders and the public at large, Huey Evans says: "I think there's been a recognition that SWFs are not there to take control, but to be long-term providers of capital in good long-term investments. They've proved that over the past few years."

Moreover, SWFs have become more transparent, following the implementation last year of the Santiago Principles -- or Generally Accepted Principles and Practices (GAPP) -- proposed by the International Monetary Fund, says Huey Evans, which has "taken some steam out of concerns".

For example, Singapore's Government Investment Corporation put out its first annual report last year, and GIC deputy chairman Tony Tan has made several public presentations this year, the latest being at the Asia-Pacific Economic Cooperation CEO summit in Singapore last month. And Mubadala Development Company put out more information than usual this year.

However, Huey Evans notes that some SWFs have been increasingly taking board seats -- for example, Qatar Investment Authority and CIC took a board seat on Songbird Estates as part of their acquisition of a stake in the Canary Wharf deal. QIA is also to take a seat on the Porsche board as a condition of its deal to acquire part of the German car maker.

Of course, as she points out, "beggars can't be choosers"; when firms are in dire need of cash, they will be rather less concerned about where it comes from than they would otherwise.

Moreover, the GAPP working group appears to have momentum. Now chaired by Australia Future Fund chairman David Murray, it held a meeting in Azerbaijan in September and will hold another in Australia in May.

"They're all getting together and moving this forward, implementing the principles, improving risk management and transparency," says Huey Evans.

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