Sovereign wealth funds are providing the fuel that's enabling many global managers, particularly those in active strategies, to recover from the financial crisis.
Among the fastest growing group of institutional investors, with assets estimated to reach about $5.5 trillion by 2012 from the current $3.8 trillion, SWFs generally held their nerve through the financial crisis, according to consultants, managers and academics who work with the funds. As the pool of assets expands at a breakneck pace, the capital available for externally managed passive and active strategies is set to increase, even when assuming that the actual percentage of the assets outsourced would remain steady or decline, sources said.
“In some cases, (SWFs) were just about the only part of the institutional business that has been growing” in the past two years, said Michael McCormack, executive director of consultant Z-Ben Advisors Ltd., Shanghai, referring to large global money managers. “It is not possible to overstate their position at the center of institutional growth strategies.”
John Nugee, London-based managing director and head of the official institutions group at State Street Global Advisors, said: “These funds are growing in size and need to deploy capital, so there's no doubt that (fund officials) will continue to allocate new cash reserves to active strategies.” SSgA is one of the largest managers of SWF assets with a total of 67 clients with $447.4 billion in passive and active assets under management as of year-end 2009 from SWFs, supranational agencies and central banks. That's nearly double the amount of assets managed at the year-end 2008, when SSgA had $234.7 billion sourced from the same group of clients. In 2009 alone, SWFs and other government-owned investment funds accounted for 77% of SSgA's institutions group's assets under management.
Like other institutional investors, SWFs — loosely defined as government-owned investment funds — are reconsidering the active risk budget within their investment portfolios. While officials from some funds, including the 2.76 trillion Norwegian kroner ($465 billion) Government Pension Fund-Global, Oslo, were shifting more assets into passive, many others were adding rather than abandoning externally managed active portfolios in the past year, sources said. Liquidity risks, particularly in relation to actively-managed alternative strategies, also have figured more prominently in the debate over active vs. passive management.