Aggregate assets of sovereign wealth funds rose by 11% to $3.98 trillion in 2010, according to a report published by Preqin on Tuesday.
The increase was generally a result of a combination of factors — including new asset inflows, currency movements and investment returns, Sam Meakin, managing editor of the 2011 Preqin Sovereign Wealth Fund Review, said in a telephone interview. “We think the increase had more to do with returns on investments” compared to other factors.
For example, the Norwegian Government Pension Fund-Global, Oslo, topped the 3 trillion Norwegian kroner ($537 billion) mark for the first time in late 2010, increasing assets by about $75 billion for the year, according to data from Preqin.
Some SWFs shrank as nations used funds to support national budgets in the aftermath of the global recession of 2008-2009. For example, Russia's National Wealth Fund, Moscow, had about $25 billion in assets at the beginning of 2011, down 58% from a year earlier.
More sovereign funds invested in alternatives, according to the report. At the beginning of 2011, 61% invested in infrastructure, compared to 47% at the same time last year. About 59% invested in private equity, compared to 56% a year ago. Real estate also gained, with 55% investing in the asset class compared to 51% a year ago. Hedge funds remained at 36%, according to Preqin.
“Sovereign wealth funds had been putting their plans to diversify into new asset classes on hold,” Mr. Meakin said. “As to be expected, when global markets stabilized (in 2010), some funds resumed those plans to increase allocations to certain asset classes — private equity in particular and generally more illiquid (investments).”
The trend is likely to continue. The government of Norway, for example, is considering allowing the global fund to invest in private equity, according to a recent proposal made by the Ministry of Finance. The investments, if approved, would be included as part of the fund's 60% allocation to equities. Separately, the Hong Kong Monetary Authority Investment Portfolio is also continuing to diversify its asset allocation and is considering adding hedge funds to its investment portfolio, according to Preqin. The Hong Kong Monetary Authority has about $300 billion in assets.
Just as SWFs are gaining importance as global institutional investors, questions are surfacing about who controls the investments of these funds in light of the political turmoil in the Middle East, where many are based, according to the report. The Libyan Investment Authority, Tripoli, which has about $70 billion in assets, holds stakes in several companies globally including a 2.59% stake in Italian bank UniCredit Group, the parent of Pioneer Global Asset Management. The assets of the LIA have been frozen under a United Nations resolution following a nationwide rebellion against Libyan leader Moammar Gadhafi.
“It's up in the air at the moment,” Mr. Meakin said. “We can't really tell what's going to happen to (the LIA's) mandate to invest the country's oil revenues.”
The SWFs of both Algeria and Bahrain could also be affected by political unrest in those respective nations, according to a news release about the report. “Collectively, the SWFs (in the Middle East and North Africa) in question have hundreds of billions of dollars in assets and changes in their investment policies would be widely felt.”
