The funds not to fear

By Jonathan Cantor, February 3, 2011
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Recently, sovereign wealth funds (SWFs), such as Australia's Future Fund and the Norwegian Government Pension Fund, have been active investors in UK property. But what are these funds, where do they invest and what is their end game?

A SWF is a state-owned investment fund, often structured as a pool or corporation, consisting of financial assets such as stocks, bonds and real estate. They are usually formed when a government has a budget surplus and little external debt. Not needing to hold onto the excess money, they instead look to invest it. Estimates suggest there are more than 50 SWFs but their aggregate size is uncertain as many do not make their financial position public.

Before the financial crisis, the International Monetary Fund (IMF) estimated that foreign assets under the management of SWFs could reach US$12 trillion (£7.5 trillion) by 2012. Suffice to say, in a business sense, if a SWF "talks", people listen.

Traditionally, scepticism surrounding SWFs stems from the (unsubstantiated) view that they may use their financial resources for strategic or political purposes. Given their inherent secrecy, it is apparent how negative opinions are formed. However, SWFs played an important role in the partial global economic recovery, being among the only investors willing to assist financial institutions in crises.

They are generally driven by achieving long-term financial returns - failure to achieve these often results in domestic criticism - and not by foreign policy.

Many SWFs have recently become more open, adopting the "Santiago Principles", a code of conduct developed by the IMF, which includes a commitment to improved disclosure and investments based solely on economic criteria. While these are only voluntary guidelines, there is a clear trend towards transparency.

SWFs tend to invest on a long-term basis and provide stability. Developed countries, such as the US, have been the main recipients of SWF investments but there may be a move towards SWFs investing in developing countries, potentially offering better economic prospects in the medium-to- long term.

Recently, three of the biggest SWFs were part of a consortium investing $1.8bn (£1.1bn) into a Brazilian investment bank. Closer to home, property consultants, King Sturge expect the majority of demand for the top UK property assets in 2011 to come from overseas investors and SWFs.

SWF have helped and can continue to help boost economies like ours. We should not fear SWFs, but treat them as we would traditional investors.

Jonathan Cantor is a partner in the Funds and Indirect Real Estate team at Nabarro LLP

    Last updated: 2:08pm, February 3 2011