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How much do the major Sovereign Wealth Funds manage?

by rziemba
August 2, 2009

This post is by Brad Setser and Rachel Ziemba of RGE Monitor

A score of recent reports have put the total assets managed by sovereign wealth funds at around $3 trillion. That seems high to us – at least if the estimate is limited to sovereign wealth funds external assets.

We don’t know the real total of course. Key institutions do not disclose their size – or enough information to allow definitive estimates of their size. But our latest tally would put the combined external assets of the major sovereign wealth funds roughly $1.5 trillion (as of June 2009) – rather less than many other estimates. This portfolio of $1.5 trillion does reflect an increase from the lows reached of late 2008. But it is well below the estimated $1.8 trillion in sovereign funds assets under management in mid 2008. Significant exposure to equities and alternative assets like property, hedge funds and private equity led to heavy losses by most funds in 2008 – a fact admitted by many of the managers.

$1.5 trillion is lot of money. But it is substantially less than $7 trillion or so held as traditional foreign exchange reserves.

There are three main reasons for our lower total.

First, we continue to believe that the foreign assets of Abu Dhabi’s two main sovereign funds – The Abu Dhabi Investment Authority (ADIA), and the smaller Abu Dhabi Investment Council (which was created out of ADIA and manages some of ADIA’s former assets) – are far smaller than many continue to claim.* Our latest estimate puts their total size at about $360 billion. That is roughly the same size as the $360 billion Norwegian government fund – and more than the estimated assets of the Kuwait Investment Authority (KIA) and the combined assets of Singapore’s GIC and Temasek. Our estimate for the GIC’s assets under management is also on the low side.

To be sure, Abu Dhabi’s total external assets exceed those managed by ADIA and the Abu Dhabi Investment Council. Abu Dhabi has another sovereign fund – Mubadala and a number of other government backed investors. Its mandate has long been to support Abu Dhabi’s internal development (“Mubadala [was] set up in 2002 with a mandate not only to seek a return on investment but also to attract businesses to Abu Dhabi and help diversify the emirate’s economy) but it now has a substantial external portfolio as well. Chalk up another $50 billion or so there. Sheik Mansour’s recent flurry of investments also has made it clear that not all of Abu Dhabi’s external wealth is managed by ADIA, the Council and Mubadala. The line between a sovereign wealth fund, a state company and the private investments of individual members of the ruling family isn’t always clear. Abu Dhabi as a whole likely has substantially more foreign assets than the $400 billion we estimate are held by ADIA, the Abu Dhabi Investment Council and Mubadala. And despite Dubai’s vulnerabilities, it still holds a good number of foreign assets, even if its highly leveraged portfolio has suffered greatly in the last year.

Two, the dividing line between China’s sovereign fund and China’s state banks isn’t totally clear. We opted to exclude the CIC’s domestic investment in the state banks from our total, as we focus on sovereign funds external assets. That is conceptually clean. But it ignores the fact that the state banks were recapitalized with foreign assets and thus manage a substantial foreign portfolio of their own. If the state banks foreign portfolio and those of the investment companies is added to the CIC’s foreign portfolio, the foreign assets of China’s sovereign funds exceed the CIC’s nominal $200 billion in size (The PBoC reports that the state banks had $220 billion of foreign assets at the end of Q1, with $120 billion in foreign portfolio investments and another $100 billion in business with offshore counterparties).

Three, we would argue that stabilization funds that are managed by the central bank and counted as part of the country’s reserves should be considered reserve assets – and not included in the total for sovereign funds. Russia’s reserve fund is a case in point. Its mandate precludes investment in anything other than classic reserve assets – and it thus has a more conservative portfolio that many central banks. We would also include SAMA’s foreign assets as “reserves.” If it walks like a duck (is managed by the central bank) and quacks like a duck (is invested predominantly in traditional reserve assets), it is a duck … While SAMA’s portfolio does include equities, so do some other central banks.

Those two pools add up. Russia had –at the end of June, a $85 billion in its stabilization fund and a $90 billion in a wealth fund (that is also managed for now by the central bank’s reserve managers). The Saudis have around $425 billion in non-reserve foreign assets (largely because the Saudi Treasury has substantial deposits with the central bank). But these pools are currently shrinking. The Saudi foreign assets fell by about $50 billion in the first half of 2009. Russia’s reserve fund will be depleted in 2010, if not before. Indeed, Russia’s current trajectory implies that its wealth fund – which was created to manage the surplus in its reserve fund – could also be exhausted in the near future.

Kazakhstan and Chile do not count their sovereign funds as part of their reserves. But their funds are mostly restricted to high grade fixed income, and they are also being drawn on to make up for 2009 fiscal deficits. Each count for about $20 billion

But the dividing line sometimes cuts the other way as well. The Hong Kong Monetary Authority has a substantial investment portfolio that isn’t invested in classic reserve assets. And Jamil Anderlini has reported that up to 15% of SAFE’s portfolio was – at least at one time – invested in risky assets. That puts SAFE’s “investment portfolio” at around $300 billion (though SAFE likely has substantial unrealized losses on this part of its portfolio, so its market value is likely less than this). If SAFE’s investment portfolio were to be considered separately, it would already be roughly the same size as many large sovereign funds.

Sum it all up and the pool of assets managed by sovereign funds and central banks that is currently invested in risky assets is around $2 trillion. And in a lot of way the amount of money available for investment in risky assets by major sovereign investors is the most important concept; it really doesn’t matter that much if the investment is managed by a central bank or a sovereign fund.

Will this total rise rapidly?

Our best guess is that it will not.

Although reserve accumulation has resumed, it remains slower than in late 2007 and early 2008. Moreover, the crisis likely led many countries to conclude that they should take fewer – not more – risks with their reserves. And perhaps some countries with sovereign funds will conclude that they would have been better served by more conservatively managed stabilization funds.

The inflow into the main Gulf funds is likely to remain subdued. Most Gulf countries are exporting less oil and are spending more at home. Mega-projects aren’t cheap. $70 a barrel doesn’t necessarily imply the large inflows that ADIA and KIA received in 2006 and 2007. Moreover, the proliferation of new investment vehicles has also reduced the inflow into the traditional sovereign funds. Much of Abu Dhabi’s surplus may be flowing to the Abu Dhabi Investment Council and other direct investors like Mubadala or the International Petroleum Investment Company (IPIC).

But for every rule there is an exception. China didn’t have to dip into its substantial stock of reserves during the crisis – and it now clearly wants to support the direct investments of its corporations. Vehicles like the China Development Bank (CDB) should grow rapidly. The CIC wasn’t fully invested prior to the crisis – limiting its losses. It is now clearly shifting out of cash and money market funds into various “risk” assets. And if China’s government decides it wants to hold more market risk, it could easily redirect some of its new reserve growth into the CIC – or just authorize SAFE to take more risk.

Estimated Foreign Assets of Major Sovereign Wealth Funds

Dec-07

Jun-08

Dec-08

Jun-09

ADIA/ADIC

453

476

338

359

Mubadala, other UAE

30

40

45

50

Kuwait

259

286

225

230

Qatar

65

82

60

63

Total GCC

807

883

668

702

Norway

371

391

323

367

Kazakhstan

21

26

27

23

Libya

40

45

50

52

Chile

14

19

20

17

Total Oil and Commodity Funds

1253

1364

1089

1160

China

90

90

90

100

GIC

245

242

166

179

Temasek

75

85

55

65

KIC

18

25

25

28

Total Asia

428

442

336

372

Total Major Sovereign Funds

1682

1806

1425

1533

Reserve-like Funds

SAMA non-reserve + pensions

335

414

475

423

Russian Reserve Fund

157

130

137

95

Russian Wealth Fund

33

88

90

Total Reserve-like Funds

492

577

700

608

All told, though, we still aren’t convinced that sovereign funds are quite as big as some have suggested – or are likely to grow all that fast in the next year or so. And for that matter, some funds may have been used heavily to support local markets and local firms, and thus may have fewer external assets than we estimate. It isn’t quite clear, for example, how the Emirates central bank financed its purchase of the large bond Dubai issued to raise emergency cash.

Then again, forecasting is hard. Forecasts that sovereign funds would swell rapidly were made just before the crisis dramatically reduced the size of many existing funds. If asset markets and oil prices soar, all bets are off.

A methodological note: Unless other information is available, we assume that these funds fared no better or worse than other investors with similar asset allocations (our estimates are based on the performance of prevailing benchmarks – see more on our methodology here). However, based on information from some funds, we did assume that a smaller share of new capital flowed into the heaviest hit risky assets in 2008.

* Landon Thomas of the New York Times has reported that ADIA has signaled that the Setser/ Ziemba estimates are within the real realm of reason.

“The Abu Dhabi authority, like all global investors, has also been hit by the world economic downturn, as well as lower oil prices — and it has tended to have a much larger position in equities, especially those in emerging markets, than other funds.
Brad W. Setser, an analyst at the Council of Foreign Relations, estimates that the Abu Dhabi fund lost more than 30 percent last year, bringing its size down to about $300 billion from a peak of $480 billion — a figure that is much lower than some of the larger public estimates and one that executives within the authority acknowledge is closer to the truth.”

The FT’s Andrew England also has used an estimate for ADIA that is more line with our estimates, reporting in December 2008 that “ADIA’s assets are estimated at $450bn-plus and traditionally its income has been reinvested in the fund, but it and the emirate’s other sovereign funds are believed to have suffered from the collapse in world equity markets.” That gives us hope we are not all off– but it is also isn’t definitive. We are always interested in other estimates, especially those that lay out the funds ADIA is estimated to have managed over time.

The most recent IMF article IV suggests that the UAE’s International Investment position was around $600 billion in 2007, roughly consistent with our estimates after accounting for the private wealth and other miscellaneous assets.

The UAE’s balance of payments data for 2008, incidentally, shows only $30 billion of outward flows from public investors – the line item that corresponds with sovereign funds. That isn’t any higher than in 2007 …

8 Comments

  • Posted by Phillip Huggan

    The recent rise of federal debt across the board translates into SWF selloffs and lesser SWF growth.

  • Posted by Rien Huizer

    Brad,

    A useful update. Still, the label “SWF” (invented by investment bankers) has little significance outside the sales desk.

    I think that unless an exception is warranted all state/CB investments in OECD cash and liquid marketable securities should be simply called: state reserve investments (I), a subset of which would be international liquidity (or reserves) characterized by their : right: liquidity. The illiquid stuff and exotics (i.e. private equity etc) should be treated and regarded differently.

    Excluded from this should be(II):
    a- state pension and “future funds”(provided there is a plan for ultimate distribution and/or identifiable beneficiaries
    b- family/tribal treasuries
    c- state conglomerates.
    d- pools of state investments made by e g OECD countries during the past few years to support the financial system. I suggest that funding for these investments is also not treated like normal gvt debt, unless the investments are worth less than the debt

    Looking at the above, ADIA, Temasek, the Norwegian fund, CIC all belong in category II, but why call them sovereign wealth “Funds” Some like Temasek are corporations, not “funds”, some are incorporated , others not, etc.

    But for understanding international monetary phenomena
    (especially in an era of rising protectionism and currency maniplulation (or rather, the world trade share of manipulators is still growing), what we need is a clear picture of reserves that can be used as such, and the in and outflows, with their sources, associated with those reserves. A state investment in a foreign (and by now maybe worthless) widget maker is not reserves, but an allocation of national public sector money to a foreign purpose. It is for the citizens of the investing countrry to hold their gvts accountable, but it should not have monetary consequences.

    Of course, if host countries would be flooded with foreign, and possibly hostile cash and the local elite feels threatened, we have a different set of issues, but that goes far beyond SWFs.

    Many countries do not accept the good government paradigm that gvt should be minimalist and market-friendly. Gvt savings and investments beyond what is needed for that core capacity are at odds with that paradigm. Pension funds are fine, if managed at arms legth from the gvt. A “future fund” for the population as a whole and under democratic scrutiny is by definition also legitimate. Bureaucratic gvts or ruling families who allocate state funds to purposes that may be illegitimate (violating WTO rules for instance) or corrupt, and in ways that cannot be democratically scrutinized, should not be assisted by OECD financial firms, or their foreign branches and subsidiaries…

  • Posted by bsetser

    Rien — interesting comments. Not quite sure how this “It is for the citizens of the investing country to hold their gvts accountable” is possible in a world where many funds are managed by unelected govs without clear ways for the citizens of said country to hold the gov. responsible. Indeed, it never was clear to me that the inhabitants of a monarchy really should be called citizens …

    I also have struggled with the right typology for thinking about sov. wealth funds, as the term encompassed a host of different things. And — since I am interested in the BoP, I really am interested in external investments. to me, there are what might be called monetary reserves (foreign) and fiscal reserves (foreign).

    Monetary reserves arise from intervention in the fx market. Fiscal reserves arise from gov. fiscal surpluses (held abroad).

    Both can be invested eiter in safe securities (classic reserve assets) or riskier f. assets (portfolio equity, debt with credit risk, PE, etc).

    In a lot of countries, fiscal reserves are held as a deposit at the cnetral bank and invested along side monetary reserves.

    Classic SWFs tended to be financed out of fiscal reserves. the fiscal reserves were judged to be large enough that a new agency was needed to invest the funds in a more aggressive way. Effectively, this means setting up an agency other than the central banks’ reserve managers to manage the funds.

    but some countries have set up de facto SWFs out of monetary reserves. Singapore is an obvious case (though the GIC gets money from sources other than the MAS). Korea too. China’s CIC was set up in a way that effectively bought fx from the cnetral bank so it would have fewer reserves. And i think you can thus think of SAFE’s investment portfolio as a “SWF” (meaning aggressively invested portfolio) managed by a central bank.

    things get more complicated when a third category of fund is included — call it a PE style fund that takes large, illiquid stakes in companies. Some SWFs that originated as fiscal reserves have done so …

    But some of what are called SWFs that originated as holding companies for the state’s domestic investment have also made extenral investments. and somse SWFs that originally were set up as vehciles to channel fiscal reserves abroad have also been used to make domestic investments. Lines get blurred …

    finally, your last point would roil the global financial system if adopted. I doubt many of the major funds would meet the test of “democractic scrutiny.” And a host of financial firms in OECD countries get significant fees for helping said funds invest …

  • Posted by Rien Huizer

    Brad,

    “finally, your last point would roil the global financial system if adopted. I doubt many of the major funds would meet the test of “democractic scrutiny.” And a host of financial firms in OECD countries get significant fees for helping said funds invest …”

    Never said it would be easy. Different winners and losers.

    “Not quite sure how this “It is for the citizens of the investing country to hold their gvts accountable” is possible in a world where many funds are managed by unelected govs without clear ways for the citizens of said country to hold the gov. responsible. ”

    Never said it would be easy. However, lots of countries are not so black and white. If (if..) there was more and better argued Western resistance to these schemes, many of which could easily conceal all kinds of boring practices, the citizens might get disgruntled.

  • Posted by Twofish

    bsetser: Not quite sure how this “It is for the citizens of the investing country to hold their gvts accountable” is possible in a world where many funds are managed by unelected govs without clear ways for the citizens of said country to hold the gov. responsible.

    In the case of China, it’s relatively easy, there is this agreement between the people and the government. You give us our money, and we don’t riot. If the banks collapses, we’ll beat you up if you are lucky, and if you are unlucky we shoot you.

    I think when people talk about accountability people have an “election’s fetish.” It’s possible to have elections that are useless, and it’s possible to have accountability mechanisms that don’t have anything to do with elections.

    It’s also ironic to me that people talk a lot about democracy when the major institutions that run the world economy aren’t particularly democratic. The Communist Party of China is far, far more accountable to the Chinese population, than the World Bank, IMF, WTO, Goldman-Sachs, Harvard, or the Federal Reserve.

    bsetser: And a host of financial firms in OECD countries get significant fees for helping said funds invest …

    And then they take some of those fees, form political action committees which hire lobbyists and give campaign donations to politicians so that they can run 30-second ads to convince people that they really have some choice.

    It’s actually not a bad system. If you have a couple of thousand people that have an interest in financial transparency, it’s not that hard to create a PAC and hire lobbyists. The problem is finding people who make money off financial transparency.

    The Communist Party doesn’t have to worry about elections but it does have to worry about mobs with pitchforks. Same thing for the big Wall Street banks. One reason everyone did whatever they could to prevent the financial system from collapsing was that if the system did collapse, then the mobs start screaming for banker bonuses and massive and intrusive state regulation of the financial industry. As it is, things are rapidly going back to business as usual.

  • Posted by Twofish

    Huizer: If (if..) there was more and better argued Western resistance to these schemes, many of which could easily conceal all kinds of boring practices, the citizens might get disgruntled.

    People won’t care unless they think that you are taking money from their wallets. As long as the citizens have bread and circuses, they won’t care what people in power do. Cynical, but true. How many ordinary people are following the committee meetings on financial regulation? All of the lobbyists for the financial institutions are.

    One big problem is that if I handed a balance sheet for a hedge fund to an average person on the street, they’d probably have no idea what to do with it. To figure out to do with it, they have to consult some sort of adviser, and anyone that knows a great deal about finance and where the bodies are buried, has a much stronger financial incentive to bury bodies than to point them out.

    Also, the “watching the watchmen” problem comes up. It just floors me when the OECD and the BIS talk about democratic accountability.

    What concerns me is not that the average person on the street doesn’t know what is going on. What is really scary to me is the degree to which regulators in major governments didn’t know what was going on.

  • Posted by Rien Huizer

    Twofish,

    Great comments. Qustion:

    “The Communist Party doesn’t have to worry about elections but it does have to worry about mobs with pitchforks. Same thing for the big Wall Street banks. One reason everyone did whatever they could to prevent the financial system from collapsing was that if the system did collapse, then the mobs start screaming for banker bonuses and massive and intrusive state regulation of the financial industry. As it is, things are rapidly going back to business as usual.”

    Who organizes China’s Pitchfork People? The only mob that was reasonably successful (as far as I know, the history of earlier dynasties’ rise to power is surrounded with too much mythology) in the modern era was the CCP. And they had quite a bit of outside help, and no real gvt to fight against. My -crude and superficial impression is that the PRC mobs have been pretty tame, even under hardship.

    Pitchfork risk has effects (you would have no problem to look at the game implications of Pitchforkers in autocratic (Czarist, Stalin Russia), bureaucratic (PRC) and even moderately democratic regimes) but they are not the same everywhere and there are many different kinds of issues that appeal to many different pitchforkers. Democracies allow these people to organize themselves and consider various options for action. Your world sems to know only gvt action and blind street violence. Democracy excells in the area in between.

  • Posted by Darren West

    Brad Setser and Rachel Ziemba – truly appreciate your work on this topic! Thank you!

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