What Commodity Crash? SWFs Surge, Add Real Assets

Sovereign wealth funds have increased their assets despite a collapse in commodity prices, which provide a base layer of capital, in the past six months, according to Preqin.

“Falling oil prices over the second half of 2014 have led to significant withdrawals from some SWFs to provide stabilization or prevent recession.”—Preqin
Total assets controlled by sovereign wealth funds (SWFs) hit $6.31 trillion at the end of March, Preqin estimated, up 17.3% from $5.38 trillion in October 2013. More than half of this figure is backed by fossil fuel or “hydrocarbon” revenues, the data firm said.

More than half (59%) of SWFs surveyed by Preqin recorded asset growth in the 18 months to the end of March, while 29% saw a decline in their assets. Of those that recorded declines, half derived their capital from fossil fuels.

“Falling oil prices over the second half of 2014 have led to significant withdrawals from some sovereign wealth funds by governments highly funded by such assets in order to provide stabilization or prevent recession, and also to fill funding gaps,” Preqin’s report said.

In contrast, the world’s biggest SWF—Norway’s Government Pension Fund Global—grew by $43 billion.

“Even though inflows have slowed, and falling oil prices may continue to impact short-term distributions to the fund, it currently looks set to remain a long-term investor in its pursuit to meet the Norwegian government’s objectives,” Preqin said.

Amy Bensted, head of hedge fund products at Preqin, said SWFs had been diversifying their portfolios into alternative assets, in particular real estate and infrastructure. Preqin reported 60% of SWFs now have exposure to both asset classes.

“While these institutions have significant investments in traditional public equity and fixed income markets, sovereign wealth funds are a growing source of capital to alternative asset fund managers and investments across the globe,” Bensted said.

Interest from sovereign funds was a key driver of inflows into private real estate, Preqin reported, while the Norwegian fund was very active in direct deals as it sought to invest 5% of its assets in property.

Preqin also forecast an increase in interest in hedge funds among sovereign investors as governments began to rely more on drawing down capital from SWFs.

“Hedge funds can offer a liquid, alternative return stream and we may see more sovereign wealth funds rebalance in the asset class’s favour in order to diversify into an asset that can offer risk-adjusted returns and regular access to their capital,” the report said.