The number of governments considering setting up some form of sovereign wealth fund is on the upswing, giving global money managers the opportunity to run new pools of assets.
Sources said the number of funds in the process of being set up, or that are under consideration, worldwide continues to grow. In Africa alone, more than 20 countries are discussing the implementation of a sovereign investment fund — encompassing SWFs and national pension funds — said the 2017 Preqin Sovereign Wealth Fund Review by alternatives data and intelligence firm Preqin Ltd.
“More governments are certainly coming to see the value in founding sovereign wealth funds as a tool to help stabilize the national economy in times of market shocks,” said Selina Sy, editor of the Preqin report, based in London.
Diego Lopez, vice president, SWF coverage at PricewaterhouseCoopers Corporate Finance LLC, based in New York, is “most definitely” seeing an increase in SWFs. “The SWF industry is fairly recent, and some of the success stories are making governments around the world consider the establishment of new investment vehicles,” he said.
Sources cited Turks & Caicos, Tanzania, Turkey, Georgia, India and Taiwan as examples of countries inspiring SWF-related headlines last year. “While debates are constructive, it is yet unclear how many funds will materialize, and most importantly, how successful they will be in fulfilling their mandate,” added Mr. Lopez.
“Anything that's an excess reserve you can invest more aggressively through a sovereign fund, which gives you an opportunity to mitigate an external risk you are worried about” such as commodity prices, said Ashby Monk, executive director and research director of Stanford University's Global Projects Center, Palo Alto, Calif. “Most SWFs set up today exist to minimize the volatility in commodity revenues or currency prices or government revenues generally.”
Continued growth in sovereign wealth fund launches has not gone unnoticed in the money management industry. General asset growth in existing funds slowed in the year ended March 2017, growing 1% to $6.59 trillion, according to Preqin. That compares to growth rates of 3.2% for the year ended March 2016, and 17.3% the year prior.
New sovereign wealth funds are an “incredible opportunity for asset managers. Generally, these vehicles are immediately big — they don't take decades to grow into the billions, and so they appeal. You've got these massive entities where a single mandate could be incredibly lucrative and for the most part, where they are building from scratch, they don't yet have the internal capabilities to run the fund,” said Mr. Monk.
Patrick Thomson, head of international institutional clients at J.P. Morgan Asset Management in London, said while the creation of such funds is not a new phenomenon, it is accelerating. One of the drivers “is continued growth in the balance sheets of the countries, particularly (in) emerging markets, whereby (these countries) are recovering, FX reserves as an indication of financial or fiscal health continue to grow, and the question from the government is, "What do we do with this money?'” The choice is leaving it with the central bank or to use it “creatively,” said Mr. Thomson. The firm's sovereign client assets under management globally were $64.5 billion at the end of March.
The main rationale for governments setting up a sovereign wealth fund is to “battle the resource curse and the mismanagement of budget surpluses, regardless of the economy's size and status,” added Mr. Lopez.
Assets are placed in a sovereign wealth fund largely for two reasons, said Ms. Sy: to house the profits from sales of hydrocarbons or other natural resources; or to invest in a country's infrastructure as a way of boosting GDP and “encouraging foreign involvement and investment in the national economy.”