Workers position drill bits on a drill rig during oil drilling operations by Targin JSC, a unit of Sistema PJSFC, in an oilfield operated by Bashneft PAO near Ufa, Russia, on Thursday, Sept. 29, 2016. Bashneft distributes petroleum products and petrochemicals around the world and in Russia via filling stations. Photographer: Andrey Rudakov/Bloomberg
Sovereign wealth funds often owe their origins to money generated from a country’s excess oil revenues © Bloomberg

Sovereign wealth funds are feeling the strain from lower oil prices and government raids on rainy-day funds, with the amount of money managed by state-backed investment vehicles falling slightly to $7.4tn.

Between March 2015 and March 2017, the collective assets overseen by SWFs — which often owe their origins to money generated from a country’s excess oil revenues — decreased 0.5 per cent. That compares with the 14 per cent increase in the two years to March 2015, according to the Sovereign Wealth Fund Institute, a research organisation.

The fall in assets has raised concerns that state funds will withdraw more money from external investment managers, which have already suffered several years of redemptions from these large investors.

The oil price has more than halved since its 2014 high of about $115 a barrel, to less than $50 a barrel now, forcing governments to pull money from SWFs to prop up their economies.

State funds responded by pulling cash from asset managers at the fastest rate on record. In the two years to the end of 2016, SWFs withdrew at least $85bn from investment houses, according to figures from eVestment, the data provider.

Those withdrawals have added to the woes of asset managers, whose profit margins have already come under pressure as investors push for lower fees and turn to passively managed funds.

The assets of Saudi Arabia’s Sama Foreign Holdings fund, the world’s fifth-largest SWF, fell 14 per cent to $514bn in the year to March 2017, while assets at Russia’s reserve fund tumbled by two-thirds to $16.2bn, according to SWFI.

Assets also fell at China’s Safe vehicle and Azerbaijan’s state oil fund, while the amount of money managed by the Abu Dhabi Investment Authority and the Kuwait Investment Authority, the third- and fourth-largest SWFs, were flat over the past year, SWFI estimated.

Bernardo Bortolotti, director of the sovereign investment lab at Bocconi University in Italy, said the landscape for SWFs, which countries typically use to either save for a rainy day or to provide money for future generations, has “changed dramatically”.

“After a prolonged period of asset growth and high returns, SWFs are grappling with the looming consequences of the oil shock and ultra-low yields,” he said.

Martin Skancke, founder of Skancke Consulting, who was previously heavily involved in running the $900bn Norwegian oil fund, the world’s largest SWF, said: “With lower overall asset growth, demand for [asset] management services is likely to be lower from [SWFs].”

Asset managers including Aberdeen, BlackRock, Franklin Templeton and Invesco were among those who are thought to have suffered large outflows from SWFs, particularly in 2015 and 2016.

According to SWFI, the assets managed by state-backed vehicles that owe their origin to oil and gas fell 1.5 per cent over the past two years, compared with growth of about 0.7 per cent for non-oil or gas-related funds.

Four of the world’s largest SWFs are based in oil-producing countries. Governments in Norway, Saudi Arabia and Kazakhstan are among those that turned to state-backed funds to help stem revenue losses as the oil price fell.

Sven Behrendt, managing director of GeoEconomica, the consultancy, said: “The price of oil has been the largest driver for asset growth across the sovereign fund industry. Since oil has come down, asset growth has shrunk.”

Mr Behrendt said some non-oil funds had failed to receive funding from their governments in recent years, while others had struggled to generate the returns needed to boost their assets.

SWFs have been forced to increase their allocations to riskier investments in an attempt to improve returns and increase assets. The SWFI data show that the value of assets invested in infrastructure, property and private equity grew rapidly over the past two years, while assets invested in fixed income fell.

“It has been a tough environment for cautious investors, which SWFs still are. SWFs are considering engaging in higher-yielding but riskier asset classes,” said Mr Behrendt.

He added that many SWFs were set up with the assumption that their financial returns would complement and eventually replace oil revenues as a significant source of funding.

“This is a crucial moment for sovereign wealth funds, in particular oil-based ones,” he said. “With the oil price lower, the question that will be asked of sovereign asset managers is to make good on that promise [to replace oil revenues].”

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