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Sovereign Wealth Funds: Year in Review 2017

December 5, 2017

Profile of a globe

The year 2017 was productive and demanding for the sovereign wealth fund (SWF) sector. Issues such as increased regulation and shifts in interest rates caused fund managers to seek out agile investment strategies. Preparation for compliance with new 2018 laws is a major concern for many funds as well.

In addition to the sovereign wealth fund trends that we’ve reported on this year, the following are important SWF highlights from 2017.

Sovereign Wealth Funds Investing More in Disruptive Technology

Middle Eastern and Asian funds report that sovereign wealth funds are investing more in private companies that disrupt businesses. They are also engaging in more direct investments in unlisted firms, as well as co-investments, which may help to generate better returns.

Jeffrey Jaensubhakij, chief investment officer of Singapore’s GIC Ltd., said, “Sovereign wealth funds used to operate like endowment funds, focusing on the right allocation between equities, fixed income and other assets.”

While this approach may have worked well during the periods of high global interest rates of the 1980s and 1990s, Jaensubhakij explains that sovereign wealth funds must adjust their strategies and approaches as interest rates drop and equity evaluations go up. The ability to pivot and adapt to global investing environments is essential for the success of sovereign wealth funds moving forward. Following companies that create disruption may be a key for funds to find better returns, as such disruptions may not immediately be reflected in index listings. 

Gulf-based SWFs are expected to increase their involvement with technology industries, as these have the potential to boost the national drive towards digitization and away from oil dependency. 

Norway’s Sovereign Wealth Fund Passes $1 Trillion; Proposes to Drop Oil, Gas

Norway’s sovereign wealth fund, the Government Pension Fund of Norway, recently passed the $1 trillion mark for the first time. This was driven by various factors, including climbing stock markets and currency shifts. The fund was created in May 1996. Since then, it has grown to become one of the world’s major stock investors, owning shares in companies such as Apple, Microsoft, and Nestle. 

The UAE’s Abu Dhabi Investment Authority follows with $828 billion in assets, while the China Investment Corporation has $814 billion.

Norway’s sovereign wealth fund is also proposing to remove oil and gas companies from its benchmark equity index (about 6 percent of its assets), in order to strengthen the fund against fluctuations in oil prices. The decision will likely influence other investors to examine their risk strategies in light of the transition to low-carbon energy systems and other environmental concerns.

Investment Allocations for the Largest Sovereign Wealth Funds

The Sovereign Wealth Fund Institute has listed the five largest sovereign wealth funds for 2017. These, along with some of their main investment activities for the year, include: 

  • Government Pension Fund (Norway): Largest holdings come from tech companies like Apple, Alphabet, and Microsoft
  • Abu Dhabi Investment Authority (United Arab Emirates): ADIA became the first institutional investor to contribute to India’s National Investment and Infrastructure Fund (NIIF). It is one of the most active investors in India, with funds in equities, real estate, and other sectors
  • China Investment Corporation (China): The fund plans to invest more in U.S. companies and startup companies
  • Kuwait Investment Authority (Kuwait): While the fund does not officially release how much it holds in assets, it is invested throughout the Middle East and North Africa, with holdings in bonds and infrastructure
  • Saudi Arabian Monetary Authority (SAMA) Foreign Holdings (Saudi Arabia): Assets mainly take the form of securities such as bonds; equities make up around 20 percent of its securities holdings

Plans for the creation of new sovereign wealth funds also appeared frequently during 2017. New sovereign wealth funds were proposed this year in India, New Caledonia, the U.K., and other areas. Such proposed funds tend to focus on strategic global objectives such as attracting more foreign direct investment, and promoting the expansion of companies overseas. Infrastructure development is also a commonly-proposed goal for newer sovereign wealth fund projects.  

Preparation for 2018 Changes in the Law

MiFID II Requirements
Many large investors have spent the year preparing for major changes in laws that will go into effect in January 2018. Specifically, the Markets in Financial Instruments Directive (MiFID II) is a top concern, as it will require firms to unbundle research and trading fees. 

According to a survey conducted by SimCorp, only 23 percent of North American investors are “extremely confident” that they have a plan to meet MiFID II requirements. The remaining 77 percent responded that they are either “somewhat or not at all confident.”

The implementation required for organizations to ensure compliance may be substantial. Investors will need to provide a “legal entity identifier code” in order to make trades through brokers in the EU, or to engage with European clients. The SimCorp. survey reveals that by September 2017, many institutional investors still didn’t have the required identifier code for engaging with European clients. 

Many organizations dedicated additional time and resources for increased research to help prepare for the MiFID II changes. The Abu Dhabi Investment Authority conducted a comprehensive internal exercise in order to assess the effects of MiFID II

EU’s General Data Protection Regulation (GDPR)

Another significant new law that received attention during 2017 is the European Union’s General Data Protection Regulation (GDPR). The regulation will cover the processing and use of data and will come into effect in May 2018. A key question that investors have been examining is what the GDPR means for international data transfers, and how the rules apply to various entities. 

Adding to the difficulty in this area is the fact that the term “data” applies to many different practice areas, not just IT and telecommunication. In particular, healthcare and employment are major areas where the GDPR will come into play. Compliance will be crucial, and sovereign wealth funds should be alert as to how the GDPR may potentially affect assets and holdings. 

Moving Forward: 2018 and Beyond

The year 2017 saw sovereign wealth funds being used in ways that are innovative and creative. Wealth funds are focusing not only on investments that offer financial returns, but can also provide insights into industries that promote national goals and agendas. Domestic investments might provide opportunities for employment growth, while international investments, such as those in the tech sector, can provide important access to market trends and knowledge. A diverse portfolio of both international and domestic firms is crucial for long-term stability and performance.

Strategic involvement in the right cases is a key factor in remedying corporate malfeasance. Securities class actions that have an institutional investor as the lead or co-lead plaintiff are dismissed less frequently and yield larger settlements. Contact us today at Kessler Topaz if you have any concerns regarding institutional engagement. 

Our team understands the complexities in monitoring a diverse global institutional portfolio. Our monitoring service, Securities Tracker, informs our clients of claims and events that may potentially affect their assets.