Simple mathematics has put sovereign wealth funds at the top of large money management firms' VIP lists. Getting those funds to cross the velvet rope is another issue.
Funds vary widely in both their asset allocations and willingness to hire external money managers. But winning mandates from most sover-eign wealth funds requires more work than with other institutional clients, managers and consultants said.
Total assets for sovereign wealth funds already total $3 trillion, half again as big as the nearly $2 trillion hedge fund industry, according to the Council of Foreign Relations' website. The International Monetary Fund estimates sover-eign wealth assets could reach $10 trillion in the next five years.
Total global pension assets for the 11 largest pension markets totaled $23.2 billion at the end of 2006, according to Watson Wyatt Worldwide in Arlington, Va.
“Consider that this $10 trillion is in 100 accounts as opposed to tens of thousands of pension accounts, and you can see why they're important to the money management industry,” said a top executive at a money management firm, who works with sovereign wealth funds. He declined to be named.
The funds' assets have grown as a commodities boom fueled growth in many emerging economies. Global trade account imbalances between the developed and emerging countries have also built up the reserves, which typically are held at central banks.
New sovereign wealth funds are springing up and growing quickly. According to the Center for Emerging Market Enterprises at Fletcher School of Business, Tufts University, Medford, Mass., 12 sovereign wealth funds have started since 2005.
New funds are expected to launch in countries such as Brazil and Japan, and some countries with one sovereign wealth fund are setting up a second to invest assets in that fund more aggressively, said Eliot Kalter, a senior fellow for the Center for Emerging Market Enterprises. He previously spent 28 years at the IMF, working with central banks.
No two funds seem to be looking for the same types of money managers, with asset allocations all over the place.
The equity allocations of sovereign funds run between zero and 100%, with most allocating between 20% and 80%, said Richard Nuzum, business leader for the Americas for Mercer Inc.'s investment consulting practice in New York.
Pools of money in the Middle East tend to be more diversified and provide the broadest opportunity for external money managers, according to managers and a report from Cerulli Associates, Boston.
The Abu Dhabi Investment Authority, for instance, outsources between 70% and 80% of its assets, while the Kuwait Investment Authority outsources at least 50%, according to the report.