Analysis: Sovereign funds' fortunes turn as emerging assets sour

Wed Aug 21, 2013 5:15am EDT
 
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By Natsuko Waki

LONDON (Reuters) - The world's biggest sovereign wealth funds may see their bumper profits of 2012 diminish this year as recent diversification into high-growth emerging markets starts to produce disappointing returns.

Their long-term horizon may allow many sovereign funds, which globally control $5 trillion of oil and other windfall assets, to weather losses. But the sheer size of these funds may increasingly limit the window of opportunities even when emerging markets recover.

SWFs have piled into emerging markets, crucially via public equity and debt markets, which are cheap to invest in and big enough to absorb sizeable investments, rather than potentially higher-yielding private equity deals, which are often too small and labor-intensive to discover real gems.

According to Thomson Reuters data, the world's top 38 sovereign funds which globally invest nearly $900 billion in listed public equities allocate more than a third of the total to emerging markets at $383 billion, up 18 percent from mid-2012.

Emerging Asia and the Middle East, where many of these funds originate, grab the biggest shares of this pie at $227 billion and $140 billion respectively.

These assets, which benefited from cheap money from advanced economies, helped many SWFs clock up double-digit profits in 2012. But good times may be ending as emerging economies struggle to attract capital flows from the recovering West.

Early indications of that come from Norway, whose $760 billion sovereign fund allocates 10 percent of its equity portfolio in emerging markets.

Its emerging equity investments lost 5.9 percent in the second quarter, with the overall fund returning just 0.1 percent in the three months.   Continued...

 
A customer looks at Li Ning shoes at a shop in Beijing, August 6, 2013. REUTERS/Kim Kyung-Hoon