Sovereign Wealth -- Winners and Losers

Published in Investing Strategy on 28 July 2009

It's been a rough year for private investors, but the huge sovereign wealth funds have found it just as hard.

About a year ago I wrote a piece on the power of Sovereign Wealth Funds (SWFs) -- giant, state-controlled investment funds that were busily buying up businesses both here and abroad.

The source of that wealth is predominantly commodities -- oil and gas in particular -- and despite falls in the value of these commodities over the past year, the nations that produce them still have plenty of funds to invest. Additionally, China is sitting on vast foreign reserves as a result of its manufacturing trade surplus; these are effectively uncashed cheques waiting to be spent or invested overseas.

But the past year has not been kind to these funds, as many of the their investments are still languishing underwater. According to a recent report by Deutsche Bank, SWFs' equity portfolios have fallen in value by 45% from the end of 2007 to early 2009, pulling total fund values down by 18% despite cash inflows.

While many of these investments are in privately-held businesses, and not as well publicised, some stakes in publicly traded companies have resulted in rather embarrassing losses. Much of this is due to a very heavy emphasis on investment in the financial sector, which of course was not the place to be over the past couple of years. Deutsche Bank estimates that, since 1995, 42% of all SWF investment has been in financials.


The China Investment Corporation (CIC) caused a stir when it took a 10% stake in private equity group Blackstone, when it went public shortly before the crisis in 2007. That $3bn holding is now worth less than $1bn, and that's after a considerable rebound in recent months. Its $5bn investment in Morgan Stanley in December 2007 will also have given it some sleepless nights in the meantime. Moving away from the financial sector, CIC recently bought 1.1% of Diageo (LSE: DGE), a company reviewed here by Tony Luckett, and it also has a holding in Tesco (LSE: TSCO).

The Gulf

Oil-rich Gulf states have also had their share of pain. Largest of the SWFs is the Abu Dhabi Investment Authority (ADIA), whose $7.5bn injection into Citigroup in late 2007 made it the company's biggest shareholder. That investment is down about 90% to date. The country did decidedly better with its holding in Barclays (LSE: BARC), which it sold at a 40% profit in June.

The Qatar Investment Authority (QIA), along with the Qatari royal family, have also done well having helped Barclays avoid the need for state assistance at the end of last year. They are also involved in the Porsche Volkswagen deal agreed last week.


Singaporean fund Temasek was less fortunate in its dealing with Barclays, buying during the ABN AMRO battle in 2007 and selling during the gloom at the start of this year. Reuters reports its estimated loss on the deal at $1.3bn. It is also thought to have lost $2bn on Merrill Lynch/Bank of America.

Former head of BHP Billiton (LSE: BHP), Chip Goodyear, announced that he will not be taking up his new post as head of Temasek in October, reportedly due to disagreements with the board regarding a shift in strategy away from the financial sector.

The buying continues

Even with their armies of advisors, sovereign wealth funds seem to find it just as hard as private investors to make the right calls. But despite the challenges, SWFs are continuing to buy up assets where they can, with the Chinese Premier reaffirming their policy of 'going out' as recently as last week. Expect them to continue being a significant feature on the investment landscape.

More from Padraig O'Hannelly:

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Fool1311499904 27 Aug 2009 , 10:21am

It is always surprising to see numbers in the press, especially when you know they are wrong! ADIA is now smaller than the Norwegian fund. Having lost over 40% in 2008, including over $6Bn in Citi and the now famous $1Bn Lehman loss on the money-market desk, did not help. Nor the multiple emerging market deals that went South! The Insider says, ADIA has around $300Bn left, and never had more than $550Bn.

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