AUTHOR: Rama Krishna Vadlamudi vrk_100@yahoo.co.

in
MUMBAI
October 10th, 2007

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Sovereign Wealth Funds (SWFs) are funds that are created by

Governments out of their foreign exchange reserves or other surpluses
for better returns through investment in risky assets. Some examples of
SWFs are Government of Singapore Investment Corporation (GIC) and
Temasek Holdings of Singapore; China Investment Corporation (CIC);
Abu Dhabi Investment Authority; Govt. Pension Fund of Norway; and
Korea Investment Corporation of South Korea.
 Funds, like, GIC and Temasek have invested in securities of various blue chip
companies in India. A few months back, China had invested USD 3 billion in the IPO of
Blackstone Inc, a private equity firm in the USA. Most of the investments by SWFs are in
the form of portfolio investments; even though, some investments are made in acquiring
strategic stakes in companies for control over management policies.

In India too, an idea was mooted to set up a sovereign wealth fund. However, as
of now, RBI is not in favour of establishing any such fund.

Liquidity in the world has gone up by several times in the past four to five years; aided in
part by surging oil prices, which had risen from USD 20 per barrel in 2003 to USD 90 per
barrel recently. Oil-rich countries, like, Russia, the UAE, and Saudi Arabia have been
rolling in petrodollars for the past four years ever since the US invasion of Iraq. The
foreign exchange reserves of several countries have been on a steep rise. For example,
China has amassed reserves worth USD 1,430 billion according to the latest figures.

It is estimated that the total amount of funds that are managed by SWFs the
world over is in the region of USD 2,500 billion; a staggering and awesome figure by any
account. According to a forecast by Morgan Stanley, the total funds may reach USD
6,500 billion by 2011. With crude oil prices on the cusp of touching USD 100 per barrel
very soon, there is no gainsaying the fact that the reserves of oil-rich countries will
continue to soar; thus enabling these funds to play a much bigger role in the world
economy.

The amounts of funds that are managed by some SWFs are (assets managed in
USD billion): Abu Dhabi Investment Authority (875); GIC (330); Temasek (100); CIC
(300); and Norwegian Govt. Pension Fund (300). These funds have been funneling huge
sums into economies of emerging markets creating a surge in the equity prices of EMs.

Sovereign Wealth Funds are established to earn better returns for the
governments’ surpluses. To attain superior returns, the funds have been moving towards
riskier returns, like, equities and private equity. It is interesting to watch whether the
funds will be able to achieve their objective of better returns. One more important thing
to note here is that the details of returns or portfolios may not be subjected to public
scrutiny giving these funds immunity from any criticism when poor returns stare at them.
In this context, it is worth mentioning that China had made a notional loss of 20% when
its equity investment in Blackstone Inc’s had depreciated after a fall in the share price of
the latter a few weeks back.

Such is the investment wisdom of the smarty money managers from Communist China!

Picture courtesy: Google

Rama Krishna Vadlamudi, MUMBAI. vrk_100@yahoo.co.in. Oct. 25th, 2007 Page 2 of 2