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The collapse in crude oil prices over the past six months has put many countries under fiscal pressure. But some oil-rich producers, such as Norway, Abu Dhabi and Kuwait, are in a more comfortable position thanks to longstanding commitments to ring-fence oil revenues into funds to preserve the value of their hydrocarbon resources.
The term “sovereign wealth fund” has only existed for a decade or so, but state vehicles seeking to provide for future generations have been investing for decades, with Kuwait’s fund going back to 1953. The work of these organisations has been pioneering in building and using wealth.
“Oil is sold and turned into a financial asset — the idea is to preserve the value of that money in line with inflation, plus some extra,” says Victoria Barbary, director of Institutional Investor’s Sovereign Wealth Center, a research service.
The larger funds are savings vehicles that aim to turn government surpluses into inter-generational wealth carriers for their youth, while some have also launched development funds focusing on diversifying domestic economies.
The oil boom of the 2000s raised the profile of these generally opaque investors, prompting concerns about the market impact of funds that make up a significant chunk of global equity markets. Many introduced policies to boost transparency, although the larger Gulf funds still keep the size of their assets under management secret.
The Abu Dhabi Investment Authority (Adia), founded in 1976, has delivered annualised returns of 8.3 per cent over a 30-year period, according to its 2013 annual report.
Since 2010, Sheikh Hamad bin Zayed Al Nahyan, a half-brother of the United Arab Emirates president, has run the fund, which has developed a reputation in global markets as a sophisticated investor, says Barbary.
Operating separately from the government, Adia has not only built a portfolio estimated at $750bn, but its policy of attracting foreign talent has transformed the fund into a training academy for young Emirati executives.
Kuwait Investment Authority, formed in 1953, is one of the oldest sovereign wealth funds. It controls an estimated $550bn and has taken a more conservative approach than Adia, perhaps because of the constant scrutiny of Kuwait’s rumbustious parliament.
Qatar came late to the sovereign wealth fund party, launching the Qatar Investment Authority only 10 years ago. The fund grew rapidly as it invested the state’s gas revenues in a future-generations fund and raised the tiny Gulf state’s global profile. With assets of around $250bn, the QIA has become one of the biggest property investors in London and Paris.
Sovereign wealth funds’ long-term horizons makes them ideal infrastructure investors. “They have been moving into the world of real assets, such as real estate and infrastructure. They are also using private equity more than in the past,” says Nick Tolchard, head of Invesco Middle East and co-chair of Invesco’s global sovereign group.
Adia has also been more aggressive in pursuing property assets in recent years, most recently seeking to bid for the Maybourne Hotel Group, owner of Claridge’s, the Berkeley and the Connaught in London.
Norway’s 25-year-old oil fund, the Government Pension Fund Global, the biggest sovereign fund in the world, is also looking to diversify away from its mandated focus on listed equities into assets such as property. Norges Bank Investment Management, the fund’s manager, is building its expertise in property as it seeks to raise its allocation to that sector to 5 per cent by 2016.
While seeking returns in more exciting emerging markets is a theme at these institutions, Invesco’s research has shown sovereign wealth funds still find developed markets to be the most reliable for long-term returns.