SWFs Reach $4 Trillion, Continue to Flock to Alts

(March 8, 2011) — Sovereign wealth fund assets have swelled 11% in the past 12 months to about $4 trillion, fueled largely by intensified alternative investment programs, according to a new report by Preqin.  

“Following global economic stabilization, many sovereign wealth funds that had delayed plans to diversify their holdings as a result of the economic downturn have now resumed these plans,” Sam Meakin, Managing Editor of the 2011 Preqin Sovereign Wealth Fund Review, said in a release. “Therefore we expect the proportion of SWFs moving into the various alternative asset classes, as well as the amount invested by SWFs in alternatives, to continue to increase in the coming year. The significant collective assets under management of SWFs means that they represent an important potential source of capital for fund managers across all asset classes.”

With their longer-term investment horizons compared to other investors, the report found that despite the challenging financial climate, SWFs have been better able to commit larger proportions of their portfolios to longer-term and alternative investments.

Preqin’s findings provide context for the Korea Investment Corporation’s (KIC) decision to allot a great portion of its portfolio to alternatives. “At this stage, we’re about 15% in the alternative/strategic space and 85% in public markets,” the KIC’s Scott Kalb told aiCIO during a telephone interview in January. “Normally, when you get involved in alts, there’s a ‘J-curve effect’ as it takes a while to get performance – but, interestingly, all our alternative and strategic investments are moneymaking, even at this early stage, which is unusual.”

The report also found that the proportion of SWFs investing in infrastructure has increased from 47% in 2010 to 61% at the beginning of this year. Infrastructure has been an increasingly popular investment for institutional investors in 2011, exemplified by the Caisse de Depot et Placement du Quebec, which has almost rebounded from a disastrous 2008 performance, with infrastructure and private equity holdings helping the investment giant to outperform its benchmark index. After suffering a $40 billion loss in 2008, the Caisse de Depot et Placement du Quebec reported that it posted a 13.6% return in 2010 investment, with net assets up $20.1 billion to $155 billion (C$151.7 billion). The gains, the fund said, were driven by private equity, infrastructure, stocks and fixed income. 

Other highlights from Preqin’s study:

• There has also been an increase in the proportion of SWFs investing in real estate and private equity – 51% to 56%, and 55% to 59% respectively.
• The proportion of SWFs investing in hedge funds has remained static at around 36%.
• Aggregate AUM of SWFs increased from $3.59 trillion in 2010 to $3.98 trillion at the start of 2011.
• Some SWFs were subject to capital withdrawals – Russia’s Reserve Fund was used to balance the federal budget over the course of 2010. Its total assets now stand at $25.4 billion compared to $60.5 billion at the start of 2010.
• Unrest in the Middle East and North Africa could have ramifications for the future investment policies of Libyan Investment Authority. The $70 billion SWF has been able to invest more freely over the past couple of years to manage the country’s oil revenues but its mandate could be altered following any political change in the country.
• The SWFs of both Algeria and Bahrain could also be affected. Collectively, the MENA-based SWFs in question have hundreds of billions of dollars in assets and changes in their investment policies would be widely felt.
• The number of SWFs investing in alternatives is likely to continue to increase throughout 2011 as they pursue higher returns and seek increased diversity.