SWFs “lose their appetite”

Steve Johnson
The Financial Times

Cash-rich sovereign wealth funds are unlikely to come to the rescue of battered global financial markets for some time to come, according to Vanguard, the $1,000bn (£694bn, €776bn) strong US fund management house.

A series of Asian and Middle Eastern state-run entities have had their fingers burned after moving prematurely to snap up stakes in beaten-up western financial stocks. The Abu Dhabi Investment Authority, the Government of Singapore Investment Corporation and the Kuwait Investment Authority all invested in Citigroup, while GSIC also invested in UBS, China Investment Corporation bought a stake in Morgan Stanley, the Qatar Investment Authority became the biggest shareholder in Barclays and Singapore’s Temasek invested in Merrill Lynch.

However, Jeff Molitor, a senior investment strategist responsible for managing Vanguard’s relationships with SWFs, said the $3,000bn sector had lost its appetite for such deals.

“There are hundreds of billions of dollars sitting on the sidelines. These organisations have a lot of cash and they feel very comfortable with that right now,” said Mr Molitor.

“There is a wariness of going back into risk assets too early. I think there will certainly be fewer big targeted investments in single entities.

“At one entity a very senior person said to me ‘when are we going to get our money back on X?’. It was clear in the question there was a certain degree of ‘I really wish we hadn’t done that’. There was some element of regret.

“I think the days of corporate enterprises going to these people and saying ‘gee, wouldn’t you like to buy a hunk of us?’ are gone.”

According to Mr Molitor, the new-found aversion to risk is most prevalent among newer SWFs that had yet to build up any investment credibility, particularly if they are run by former finance ministry or central bank staff with little market experience.

“One said to me ‘I’m willing to leave the first 20 per cent on the table’.

“They are holding back, early is the new wrong,” he said.

Sovereign funds do still have some appetite for government bonds and investment grade credit, as well as property, Mr Molitor said, but their interest in alternative investments also appears to be waning.


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