Market commentators that have blamed sovereign wealth funds (SWFs) for driving the recent equity market sell-off may be wide of the mark, according to advisory firm GeoEconomica.
The majority of drawdowns from SWFs last year were smaller than their annual investment returns, wrote GeoEconomica Managing Director Sven Behrendt in a note published by the International Forum of Sovereign Wealth Funds. This is despite a series of commentaries claiming large withdrawals from SWFs have led to price falls across stock markets.
While Behrendt said he agreed that “some funds have seen substantial withdrawals,” most of these are “fiscal stabilization funds.” These include Russia’s Reserve Fund, which Behrendt said had seen nearly $40 billion of withdrawals in the past 18 months, and the Saudi Arabian Monetary Agency.
“The drawing down of savings stored in fiscal stabilization funds has been fairly predictable and little surprising,” Behrendt said. “This is the scenario for which they were established in the first place.”
Long-term savings funds, which make up a greater chunk of the SWF universe, have not seen the same level of withdrawals, Behrendt argued. For example, Norway’s government is expected to take up to NOK 80 billion ($9.7 billion) from its Government Pension Fund Global, the largest SWF in the world, this year.
“But here is what sets it apart from fiscal stabilization funds,” Behrendt wrote. “Withdrawals will be more than offset by the cash flow generated by its investments which in 2015 amounted to over NOK 190 billion. In other words, government withdrawals will not bite into the fund’s capital base and reduce savings, but are covered by its profits.”
Behrendt estimated that other large SWFs, including the Abu Dhabi Investment Authority, the Kuwait Investment Authority, and the Qatar Investment Authority, have all generated returns substantial enough to make a meaningful contribution to public expenditure in those countries without having to sell assets.
“The large SWFs of the Gulf region and the profits they ought to earn have become important instruments to help maintain the financial solidity of the governments that established them decades ago,” Behrendt concluded. “The consequences of this trend are profound. External asset managers who currently bemoan SWF redemptions are better advised to supply the products that this special investor class demands in current circumstances.”
Read Sven Behrendt’s note in full on the IFSWF website.