Sovereign wealth funds to focus on commodities, emerging markets in 2010

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30 Oct 2009

Sovereign wealth funds will focus their buying on natural resources and emerging markets in 2010, after picking commodities over financials for most of their $94 billion investments this year, a senior Barclays banker said. Sovereign funds, managing as estimated $3 trillion (1.8 trillion pounds) in assets, had their fingers burnt in their bold investments in Western banks such as Citigroup and UBS during the early phase of the global crisis.
The funds are returning to markets cautiously after portfolio losses last year forced them to rethink their strategy and risk management, said Gay Huey Evans, vice chairman for investment banking and investment management at Barclays.
"People are going back into the market, but they are going back quietly, gently, thoughtfully, not with a bang," Evans, Barclays' leading banker for state funds, told Reuters on Wednesday.
"Political pressure was certainly as strong as the real market performance in causing sovereign funds to reshape and rethink their overall investment strategy."
Sovereign funds from Kuwait to Singapore came under fire from some lawmakers and citizens for losing billions of dollars on U.S. and European banks.
Singapore state investor Temasek lost an estimated $4 billion on its investments in Barclays and Merrill Lynch, while the Kuwait Investment Authority has lost money on its Merrill Lynch and Citigroup stakes.
Evans said state investors, led by China and Abu Dhabi funds, switched focus to natural resources such as energy or agriculture this year, ploughing 61% of their total investment or around $57 billion into the sector and only 15% in financials.
This was a shift from 2008, when 48% of the $130 billion in investments went into financials and only 8% went into natural resources.
Barclays estimates take into account China Development Bank's jumbo loans in 2009 to fund oil deals, but exclude Dubai Financial Support Fund's move to bail out Dubai.
London-based Evans, visiting Singapore to oversee a training workshop for Asian, Middle Eastern and Russian state funds, said China Investment Corp and Abu Dhabi-based IPIC and Mubadala have led the way this year with 28 deals worth $22 billion.
"I would expect the natural resources theme to continue to be at the forefront, as well as investments into emerging markets," she said in an interview. "People like real assets...this was a natural trade for those countries that are short commodities, eg China and South Korea."
China's insatiable appetite for natural resources has spurred its sovereign funds to join state enterprises in multi-billion dollar energy deals in countries such as Australia, Singapore and Indonesia in the past few months.
CIC said on Wednesday that it was buying commodities for investment returns and not to secure resources.
OTHER ASSET CLASSES
Evans said sovereign funds, some of which operate more like asset managers such as Norway's oil fund, have been moving away from traditional bonds to include other asset classes. Some also moved away from active management earlier this year.
She said state funds are also looking at real estate markets once again after they moved away from the hard-hit sector in the earlier part of this year.
Evans said sovereign funds will continue to grow in size as a result of recovering commodity prices and fiscal surpluses.
"There is optimism and probably rightly so, that there will continue to be growth in sovereign funds."

Source: Reuters