Sovereign wealth funds (SWFs), state-owned investment funds designed to manage money put aside by a country for a “rainy day”, have in the last decade or so been viewed as “walls of cash” by investors – a vast source of funds waiting to be put to work in global markets. During the financial crisis, for example, SWFs were among the deep-pocketed suitors that struggling global banks turned to in their hour of need. But the crash in oil and commodity prices has seen that rainy day finally arrive for many countries, resulting in a marked change of direction for SWFs. They’re no longer a wall of money, so much as a whirlpool sucking cash out of markets.
And there’s no sign of the tide turning. The funds collectively withdrew around $100bn from external asset managers in the six months to September 2015. And while SWFs are “notoriously secretive”, says Attracta Mooney in the Financial Times, Berik Otemurat, a former senior official at Kazakhstan’s central bank, recently lost his job after warning that his nation’s SWF would be “completely drained by 2026” if the government kept raiding it to prop up its economy. (Since an August 2014 high of $77.2bn, its assets have fallen by 16.8%.)
This haemorrhaging of cash from SWFs can largely be explained by the current resources rout. The Sovereign Wealth Fund Institute estimates that at the end of 2015 more than 56% of SWF assets came from the export of oil and gas-related products. With the price of oil at its lowest in 12 years (see page 24), and fears that it will go even lower due to the lifting of sanctions on Iranian oil exports, it’s no surprise SWFs are suffering.
Globally, SWFs control around $7trn in assets, with more than a third managed externally. Of that, reckons Credit Suisse, around $4.3trn is run by oil exporters – and as the chart above shows, when the oil price falls, so do SWF assets. Such large-scale withdrawals will inevitably dent the profits of the asset managers who manage this money (and earn their fees based on the size of assets under management). For example, warns Morgan Stanley, if redemptions continue at the same pace as during 2015, then Aberdeen Asset Management, for instance, could see its earnings per share drop by 4.1%.
Beyond the profits of asset managers, what could the impact be on wider markets? Capital Economics is relatively sanguine. “While not entirely unfounded”, fears of a mass SWF exodus hurting markets “are exaggerated”. Although SWFs are a significant force – amounting to nearly 9% of the combined value of global equity and bond markets – some oil producers (Norway, for example) are less reliant than others on their SWFs to stabilise their economies. Even if SWFs do keep pulling money out of markets, in the longer run “falling oil prices transfer income from countries that are net producers to those that are net consumers, where savings rates have historically tended to be lower”. In other words, consumer countries will have more money to spend, boosting corporate profits overall.
But in the short run, it could be a major headwind. JP Morgan estimates that at $31 a barrel of oil, SWFs will have to sell $75bn of equities this year. Combine that with less buying from private (“retail”) investors, and “overall equity flow from retail and SWF investors [could be] barely positive for 2016”. And as the Zero Hedge financial blog points out, “the first two weeks of the year haven’t done anything to… put retail in a bullish mood”.
In the news this week…
Research company Morningstar is to start scoring funds on their ethical standing. From March this year, the majority of the 200,000 funds monitored by Morningstar will now be allocated a score based on the environmental, social and governance (ESG) standing of their holdings. “Asset managers fear losing billions of dollars” as a result, says Attracta Mooney in the FT, as investors become more aware of how “ethical” or otherwise their funds are. The shift will “completely change the narrative” of investing as managers try to avoid being ranked lower for ESG than their peers, reckons Sasja Beslik, head of responsible investment at €190bn Nordea Asset Management.
The Alliance Trust investment trust has now appointed industry veteran Robert Smith as its new chairman, says Chris Newlands in the FT. Lord Smith of Kelvin is currently chairman of Scotland’s Green Investment Bank, Forth Ports and engineering company IMI, and was previously chairman of Weir Group and energy company SSE. His appointment will be welcomed by investors who suffered a tumultuous 2015, which saw the exit of both chairman Karin Forseke and chief executive Katherine Garrett-Cox, famously the orchestrators of a £3m battle against activist investor Elliott Advisors.
The Financial Conduct Authority (FCA) could allow some form of commission back into the financial advice market, says
Tom Selby in Money Marketing. Those in favour of its return say it might help to prevent people being put off seeking advice because of the fees. The suggestion came in a BBC interview with Tracey McDermott, acting head of the regulator. Needless to say, we think it’s a bad idea. If people are put off paying for advice by transparent fees, then the answer is better financial products and information, not a return to sneakier fees.