According to him, making those judgment calls is a requirement of their business, but they must realize that they are not operating in a vacuum. “Wherever SWFs invest their money, they are part of the recycling process whether or not they place it in a financial institution,” he says.
Those in the echelons of power believe it’s equally important for SWFs to base their investment decisions purely on business reasons. Tharman Shanmugaratnam, the Finance Minister of Singapore (the home of Temasek Holding), believes it is important for SWFs not to act politically. “There would be opportunities in the cycle for any long term player, particularly with little leverage, but they have to make their judgments on a purely commercial basis. It is certainly not because of any second-guessing of what governments prefer,” says Shanmugaratnam. He maintains it is unfair to treat all SWFs the same way: “they all have unique characteristics. I wouldn’t say it is a geographical distinction as much as the fact that they each have distinct characteristics in terms of their source of funds, their investment orientation and approach.”
Inward-bound? In the coming months, it will be interesting to see whether the turbulence in the West compels these funds to look inwards. There is little evidence to suggest a conclusive shift in that direction at this stage, although there are exceptions. Kuwait’s KIA was probably the first to come forward on that count, saying it is “committed to investing in local stocks to support the Arab world’s second-largest bourse.” The KIA manages the country’s $184 billion Future Generations Fund, a portfolio of overseas investments, and the General Reserves Fund, which is worth about $40 billion. QIA has also announced that it would buy up to 20 percent of Qatari banks’ shares to support their capital. Truman says some of these funds are now shifting to domestic investments, but again it is difficult and inappropriate to generalize that this is the case for all SWFs.
For Alex Barrett, the global head of research at Standard Chartered, the bigger picture revolves around finding the opportunities. He sees investment decisions being taken on tried and trusted parameters once the current period of uncertainty ends. “The authorities are trying to move from a disorderly leveraging to an orderly leveraging but there will be, during that process, great opportunities,” he says. Barrett, however, has no clue whether SWFs are shifting to their home markets or elsewhere, and what is driving their decisions. “They were involved early on in recapitalization of some of the financial institutions. It seems in hindsight to have been too soon,” he says. Will they be involved on a longer term? Barrett certainly feels so. “Sovereign wealth funds, not just the ones in this region or in China, but even those in the West are increasingly focusing their investment on Asia and the developing world,” says Barrett.
Whether they look for investments abroad or inject cash at home, the rise of SWFs have led to an economic resurgence at one level. There is also a realization that wealth accumulated through oil revenue has to be judiciously used, keeping the long term interest of the country in mind.
Saudi financial group Samba’s September report, “The Global Oil Market: A Long-Term Perspective,” links this wealth to oil production and its prevailing costs. The report theorizes that if the returns are high there is an increasing incentive to produce more oil and transform the proceeds into other forms of wealth. “Conversely if returns are low, there is more of an incentive to leave oil in the ground. This issue has become more topical as it touches on the mounting public concern expressed in some OECD countries over the activities of SWFs,” the report says.

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