Sovereign Wealth Funds To Hit Record $5.6 Trillion By Year-End

Sovereign wealth funds (SWFs) are set to see their assets grow to $5.6 trillion by the end of 2013, a study found, a sum more than double British GDP and underscoring their status as the world’s wealthiest investors.

SWFs, state-owned vehicles such as the Qatar Investment Authority which manage windfall revenues for future generations, have become key global market players after the financial crisis, spending an estimated $90 billion buying up stakes in Western banks including Barclays Plc for instance.

Benefiting from a decade of high commodity prices and trade surpluses generated by booming trade, their assets have swollen to record highs, growing eight per cent in 2012 to $5.2 trillion and set for further growth the study by TheCityUK found.

By comparison, Britain’s GDP was $2.4 trillion in 2012, according to International Monetary Fund estimates.

“SWFs should see a continuation in the inflow of capital in the coming years as some Asian countries, particularly China, continue to build up foreign exchange reserves, and commodity demand increases with the recovery in the global economy and growth in demand from emerging markets,” TheCityUK said.

TheCityUK, a London-based group tracking the financial services industry, said the assets of SWFs funded by commodity exports – a category including Gulf funds and Norway’s Government Pension Fund – totaled $3 trillion at the end of 2012, or 58 per cent of the total.

But non-commodity SWFs in countries such as China, funded by the transfer of assets from foreign exchange reserves or budget surpluses and privatisations, are also growing fast.

“Non-commodity funds are capturing an increasing share of SWFs’ assets, a trend that is likely to continue,” TheCityUK said, noting non-commodity SWF assets were twice the level of five years ago.

Asset growth is also coming from new fund launches. Angola, Western Australia and Panama launched wealth funds last year, while Bolivia, Canada and Taiwan are among those planning funds.

HOT REAL ESTATE

Apart from bank investments, SWFs are emerging as buyers of prime real estate in Western capitals, with the China Investment Corporation last year snapping up Winchester House, the London headquarters of Deutsche Bank for £245 million.

Another example was Gingko Tree Investment Ltd, a unit of China’s State Administration of Foreign Exchange, which invested more than $1.6 billion in office buildings and student housing in London and Manchester.

The Shard tower and the Chelsea Barracks are among the trophy London properties that have received investments from Middle Eastern SWFs in past years, while Norway’s $700 billion fund last year said it would raise real estate assets to as much as five per cent of its portfolio from 0.3 per cent.

There were some $10 billion in real estate transactions last year, TheCityUK said, citing data from the Sovereign Investment Lab at Bocconi University in Milan. SWFs’ predilection for real estate is driven by low bond yields in some developed countries and stock market volatility, the report said.

The report found however that overall overseas direct investments by SWFs dropped last year.

Their foreign direct investments totaled $57 billion in 2012, down more than a third on the previous year, TheCityUK said, citing the SWF Institute’s Sovereign Wealth Fund Transaction Database, which tracks transactions in the industry.

The report noted that since 2008-2009 SWFs have been cutting back on foreign spending to help stabilise domestic financial markets, which were starting to be affected by the economic downturn and falling commodity prices.

“SWFs had also faced public criticism in their countries following a string of losses on their foreign investments at the outset of the credit crisis,” the report added. “The deal transaction sizes have been smaller in recent years as a result.”