Global to Local

Increased global competition for sovereign wealth fund assets


  • Middle East sovereign states deploy wealth into local economies during Arab Spring
  • Sovereign assets starting to divert away from international trophy assets and other global investments
  • Sovereign wealth fund surplus may reduce despite oil price rises as local investment continues

Major sovereign governments and sovereign wealth funds (SWFs) in the Middle East are investing less internationally than they have done at any point in the last three years, according to the third annual Invesco Middle East Asset Management Study. Invesco opened its Dubai office in 2005, and has been working with GCC clients for decades, offering financial institutions and investment professionals access to global investment expertise.

Invesco’s study, which is the only in depth report of its kind, has analysed sovereign revenues and defined the investment behaviours of major SWFs in the Gulf Cooperation Council region (GCC). These SWFs account for 35 percent of global SWF flows, representing $1.6 trillion, a huge market which major global economies, including the UK, rely on for investment. SWFs are fundamental to the GCC asset management industry and account for 88% of existing investable assets and 74% of new assets according to our study.

This is Invesco’s third asset management study of the GCC region (comprising the UAE, Saudi Arabia, Qatar, Bahrain, Kuwait and Oman). Invesco worked with independent strategy consultants NMG to conduct an in-depth market study based on over 100 face-to-face interviews on retail and institutional investor preferences across the GCC. The insight into sovereign capital flow is just one theme from this detailed study.

The study has revealed that the international flow of money directly from GCC sovereign governments and from SWFs has changed considerably in light of the current unrest, with large commodity-linked surpluses in these regions increasingly being put to use locally. While GCC locals are generally wealthier and more content than locals in the MENA regions affected by the Arab Spring, GCC governments are still keen to demonstrate that the region’s large commodity-linked wealth is reaching the local population.

Sovereign surplus reducing despite oil price rising

The available surplus, or investable assets, of governments in the GCC region is forecast to reduce by 9% in 2012 (when compared to 2011) and surplus forecasts have been revised downwards since the Arab Spring.  This is illustrated by the fact that forecast funding rates for the recipient SWFs have declined this year.  According to Invesco’s study, in 2011 funding rates grew at 13% compared to an increase in GCC government revenue of 25%, this year funding rates rose just 8%, despite GCC government revenue increasing by 31%. Funding for sovereign pension funds on the other hand rose from 8% growth in 2011 to 13% growth in 2012. There is an expectation that spending will continue to increase over time potentially outstripping commodity prices and shrinking surpluses further.

Sovereign wealth funds investing more locally

Of the sovereign surplus that is available for SWFs, those with local objectives are expected to benefit. Invesco forecasts SWF assets invested in benchmark driven SWFs who prioritise international asset manager products or ETFs have fallen by 1% since the beginning of the ‘Arab Spring’ in 2011. At the same time sovereign wealth fund assets allocated to SWFs investing locally, in infrastructure for example, have risen by 10%, which illustrates a major shift (see Fig 3). GCC government spending is increasing across the region. In some cases spending drivers vary with Saudi Arabia and Oman under more pressure to address unemployment, education and healthcare than wealthier states with smaller local populations such as Qatar and UAE. Despite subtle differences, a common trend throughout the GCC is significant wage inflation (across private and public sectors) ensuring that more money flows directly to local populations. Importantly, respondents also indicated a strong expectation that spending will continue to increase over time outstripping commodity prices and shrinking surpluses further.

In the aftermath of the Global Financial Crisis, a number of GCC institutions suffered significant losses from a range of investments, forcing new processes and increasing scrutiny from government officials, shareholders or wealthy business owners. The ongoing market volatility has maintained stakeholder pressures and provided an immediate test to any new governance processes and investment strategies.

Nick Tolchard, Head of Invesco Middle East commented: “It’s clear that sovereign states are redirecting revenues and SWF assets from international investments back into the Middle East.  The most common change across the region is money into local wage inflation, with healthcare and education a real focus for Saudi Arabia and Oman. Major infrastructure is a focus for Qatar due to the World Cup, and there are significant developments taking place in Abu Dhabi as it seeks to grow and set up as a major financial centre.

He added: “Western governments, including the UK, have approached SWFs from the Middle East to help with economic recovery, but many will fight a losing battle. There is certainly less money to invest internationally so the stakes are higher. Those courting GCC money from outside the region will only win with a deep understanding of what is driving the thinking of SWFs, and a long term commitment to building bi-lateral relationships which add value to their investment policy.”

Last year, Invesco created the first ever framework that categorises the core objectives of SWFs and revealed the drivers behind the investment strategy and preferences of these huge investment funds

Sovereign wealth funds were categorised as:

  • Development Agencies’: SWFs focused on local development projects and investments.
  • ‘Policy Supporters’: SWFs that use international investments to drive foreign or local policy outcomes.
  • ‘Diversification Vehicles’: SWFs that invest internationally typically referencing a global benchmark for asset and geographic allocations.
  • ‘Asset Managers’: SWFs that are purely focused on risk-adjusted investment returns, typically with broad scope to invest across assets and regions.

Last year, the study revealed that traditional investment SWFs – diversification vehicles and asset managers – appeared to be favouring developed markets, with around 54% of GCC SWF assets held in this region with the highest exposure to North America (29%) and to Western Europe (19%). Investment in North America is now down this year at 14% and Continental Europe down at 4%, as a result of the Eurozone crisis.

The clear shift in terms of geographic allocation of investment money has been towards the local region. Investment in assets related to the GCC moved up from 33% to 56%, with local bonds seeing a rise from 6% of SWF investable assets to 14%.  Property and infrastructure have also take a large proportion of the investable assets from these SWFs, 13% and 14% respectively.

Nick Tolchard commented: “The story this year is that it is no longer a given that large sovereign governments are going to direct their oil revenue surpluses around the globe, pumping cash into other global economies. There will be high profile, strategic investments like the proposed RBS deal, or indeed other large trophy assets, but it’s a changed market. There will be contestable assets for fund managers in core relevant markets but with more money being deployed into the local economies it is likely to be a much more competitive landscape as long as the unrest continues.”


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