A DECADE ago, the phrase ‘sovereign wealth fund’ made some European and American politicians shudder. No wonder. Back then — or before the 2008 financial crisis — these entities mostly hailed from Asia and the Middle East, and were lamentably opaque. So much so, that they were popularly perceived in the west as the financial equivalent of a James Bond villain: shadowy, powerful and potentially sinister.
How times change. When George Osborne, the UK chancellor, unveiled his Autumn Statement on Wednesday, he tossed the word ‘sovereign wealth fund’ into his speech. This was not to criticise, but to copy: he plans to create Britain’s first sovereign wealth fund to channel money from the future development of shale gas in the north of England into infrastructure.
Right now, this looks more like a vote-grabbing gimmick than a concrete plan. Shale gas development has barely started in the UK. But the move is symbolic for three reasons.
First, it shows the degree to which the sector has been stealthily rebranded since the financial crisis. No longer are western politicians just fretting about these funds’ motives; instead they are aping them, or passing around the begging bowl.
That partly reflects expediency (western economies need capital) and the fact that Chinese and Middle Eastern funds have kept a relatively low profile. But the sovereign wealth fund sector is changing too.
Consider that the largest fund in the world today is found in Norway — not China or the Middle East — and it has an exemplary record for transparency. So do its brethren in places such as Australia, Ireland and New Zealand. And while some funds remain opaque (in Algeria or Qatar, say) others in the Middle East (such as the Abu Dhabi fund) are quite transparent. China’s and Russia’s funds sit somewhere in the middle.
However, this rebranding has occurred alongside a second theme: away from the limelight, the sector has expanded fast. If you use the narrowest definition of a sovereign wealth fund — a state-controlled entity that invests national wealth for the benefit of future generations — the global sector had a ‘mere’ $3tn of assets in 2007. Last week, however, the Sovereign Wealth Fund Index, a research group, said these assets have jumped to $7trn, or two and a half times the size of the hedge fund world.
About two-thirds of this SWF money is in ‘commodity funds’ created to manage the windfalls created from oil and gas. But there are now 78 funds in total, compared to less than a dozen a decade ago, and found in places ranging from France to Azerbaijan, New Zealand to Texas.
That, in turn, reveals a third point: the growing debate about infrastructure.
These days, as the recent meeting of the International Monetary Fund clearly illustrated, there is a burning need for more global infrastructure investment. McKinsey, a consultancy, reckons that (ideally) about $57trn is needed before 2030 to fund energy, water, transportation and social projects around the world.
Thus far, it has been lamentably difficult to get private sector investors to fill this void. But groups such as the IMF increasingly hope that sovereign wealth funds could plug this gap.
After all, these funds have admirably long time horizons (Norway’s fund, for example, claims to operate on a 100-year view). They also have return targets that tend to be lower — and thus more realistic — than many pension funds.
Some funds are also becoming innovative. Norway’s gigantic fund, for example, is at the forefront of environmental and social investing. New Zealand’s fund is conducting bold experiments to break down the barriers between asset classes such as equities and bonds.
Even in conservative Singapore, the GIC fund is exploring novel ways of managing liquidity risk. Experiments to fund infrastructure seem like a logical next step. Sadly, for the moment, this is still mostly a pipe dream (or perhaps a bridge, road and airport fantasy). Notwithstanding the IMF appeals — or Mr Osborne’s vague pledge this week — real change is slow.
However, it would be nice to hope that by the time shale gas does get developed in England — if that moment ever arrives — there will be some viable infrastructure experiments to copy. Putting more of that $7trn pile into infrastructure would be far better for global growth than just pouring money into US treasuries and trophy buildings — or football teams.
Published in Dawn, Economic & Business, December 8th , 2014
