Kuwaiti sovereign wealth fund may pull billions from external managers

Kuwait Investment Authority is planning to manage more of its own assets as the world's fifth-largest sovereign wealth fund seeks to take more risk to boost returns.

The KIA wants to increase the allocation of funds managed in-house to as much as 8% from 1% or 2% at present, Managing Director Bader Al Saad said in an interview with Bloomberg Television on Wednesday at the World Economic Forum in Davos, Switzerland. The KIA has $592 billion of assets, according to the Sovereign Wealth Fund Institute, meaning $35 billion could be withdrawn from external managers.

“Why do I have to pay extra fees for less return?” he said. The shift translates into “a big lump sum but it's small compared to the core portfolio,” Mr. Al Saad said.

The KIA joins other wealth funds and institutional investors seeking to manage more assets internally as management fees come under scrutiny. The $305.5 billion California Public Employees' Retirement System, Sacramento, said last week it was developing plans to shift as much as $30 billion from external to internal management. The Abu Dhabi Investment Authority, the world's second-biggest wealth fund, is investing in areas such as real estate and private equity, reducing its reliance on outside managers each year.

“Management fees have always been a contentious issue and in the good days people grudgingly accepted,” Fabio Scacciavillani, chief economist of the Oman Investment Fund, said by phone Wednesday. “That's not the case anymore. Costs are coming under increasing scrutiny and with low returns it's hard to justify the costs.”

Mr. Al Saad said the KIA is investing more in private assets and global infrastructure projects, arguing that “we need to take more risk in order to maintain the returns.”

Mr. Al Saad said he doesn't think the fund can match the returns of the past decade over the next 10 years. “That's why we want to do something different. That's why we are expanding in infrastructure, in credit.”

For sovereign wealth funds, “it's better to build in-house expertise, which can provide benefits such as better control on strategy and more flexibility to direct investments towards promising area,” Mr. Scacciavillani said. “After all, when funds give their money to external managers, it's not like they can forget about it. They still have to follow it and that adds to the cost,” he said.

The KIA, which has been investing in ports, airports and power distribution, says boosting U.S. investment is contingent upon President-elect Donald Trump holding to a promise to increase infrastructure spending.

“To write a big check, you need to see projects in infrastructure,” Mr. Al Saad said. “Otherwise there's no size. You need scale.''