The total assets of sovereign wealth funds topped $6.31tn in March 2015, more than double since 2008. As a result of their ever growing assets under management its influence on global financial markets is increasing substantially. The growth in assets of sovereign wealth funds has been driven by continued funding from governments and reserves as well as from investment returns generated by these investors in their continued hunt for long-term yield in a low interest rate environment.
World’s largest sovereign wealth fund gains 5.3% in Q1 2015
Among 73 sovereign wealth funds worldwide, Norway’s Government Pension Fund Global is the world’s largest sovereign wealth funds. Norway Wealth Fund manages $900 billion assets, 15 percent of the total $6.31tn assets of sovereign wealth funds globally. It gave high return of 5.3% in the first quarter. It gained $53 billion mainly by 7.5% rise in stock price. ECB’s unprecedented monetary stimulus drove up the European stock markets.The value of Norway Wealth Fund’s equity holdings jumped.
“After a weak return on European stocks last year, the market rallied in the first quarter. There were big price movements in the European market,” said Yngve Slyngstad, CEO of Norway Wealth Fund.
Negative impact of oil prices on sovereign wealth funds’ assets
Two-third of Sovereign Wealth Funds derive their capital from oil and gas. Falling oil prices since June 2014 adversely impacted sovereign wealth funds. The assets of one third of sovereign wealth funds declined. Oil revenue dependent countries made significant withdrawals from some sovereign wealth funds in order to cover shortfalls in oil revenue and bridge budgetary gaps. For example, Russia withdrew capital from Russia’s National Wealth Fund and Reserve Fund. The Russian economy, the second-largest crude exporter, is largely dependent on oil prices. The government budget is largely dependent on oil revenues. Its currency is also greatly affected by oil price. The steep fall on prices together with Western sanctions has been devastating for Russian economy. Russia had to use sovereign wealth funds to cover deficits and to undertake stimulus measures to boost the economy
Small number of sovereign wealth funds
Though sovereign wealth funds continue to accumulate assets, its number is small and not growing. There are only 73 sovereign wealth funds globally. In 2014 only one new sovereign wealth fund, Ireland Strategic Investment Fund, was formed. In 2015 also, only one sovereign wealth fund is likely to be added; Hong Kong Future Fund is being created by the Government of Hong Kong.
And there is reason for this slow speed. Sovereign wealth fund are state-owned investment funds. Sovereign wealth funds are generally funded by revenues generated from the exports of oil & gas, natural resources and other commodities or from central bank reserves that accumulate as a result of budget and trade surpluses or from foreign-exchange reserves held by the central bank.
Sovereign wealth funds investment in Alternative Assets Growing
The sovereign wealth funds invest in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.
“Alternative assets have emerged as an increasingly important portion of the portfolios of many sovereign wealth fund investors over recent years, as these investors seek to diversify their portfolios and acquire assets that can generate yield and help them meet their long-term objectives.”
“Their large assets under management make sovereign wealth funds increasingly important sources of capital for the real estate asset class. As they have moved to diversify their portfolios and acquire assets that help them meet their long-term objectives, alternative assets, and particularly real estate, have emerged as an increasingly important part of the portfolios of many sovereign wealth funds,” says Andrew Moylan, Head of Real Assets Products, Preqin -a leading source of information for the alternative assets industry.
To conclude, sovereign wealth funds, despite being small in number and secretive in nature, continue to grow are a force to be reckoned with. Sovereign wealth funds, with their big pockets are turning to alternative investments to diversify portfolios and boost returns.
Kanchan Kumar is an experienced finance professional and has worked as an Executive Director and Advisor with the MNCs. He is a former banker with two decades of working experience with a Financial Institution. He is a rank holder in MBA (Finance) and Gold Medallist in MS (Statistics). He has passion for research and has also taught at a University. He writes on Global Economy, Finance and Market.