Middle East sovereign wealth funds 'coping' with low oil price environment

Sovereign wealth funds from across the Middle East, which reined in spending last year unlike their global peers, are coping with the low oil price environment, according to the asset manager Invesco.

Confidence remains stable in the Middle East, where a lot of work was done on risk management, governance and asset allocation in the wake of the global financial crisis, said Alex Millar, the head of Invesco’s Emea sovereigns division.

“As a consequence, while they [Middle Eastern funds] are in an environment that is challenging, they feel better able to cope with that,” said Mr Millar. “Clearly, if oil prices remain low, there may well be future withdrawals but what we’re seeing is that a number of funds thought they might have to face redemptions but haven’t. Governments are using a variety of sources for funding and sovereigns are just one of those.”

The low oil price environment that affected the region for most of last year meant that the 15 regional funds interviewed for Invesco’s Global Sovereign Asset Management Survey either withdrew or cancelled planned investments equating to 7 per cent of assets, while making new investments equating to just 3 per cent. Globally, the reverse occurred – new investments accounted for 7 per cent of assets and withdrawals were 3 per cent.

This was partly due to the Middle East having more investment sovereigns (those set up to invest a country’s wealth, as opposed to “liability sovereigns” managing government pension funds), said Mr Millar. Investment sovereigns brought in new financing equivalent to 4 per cent of assets, but withdrew 5 per cent as returns softened.

The 77 sovereign wealth funds surveyed by Invesco globally, with assets under management of US$8.9 trillion missed investment targets last year. Returns on investment stood at about 4.1 per cent globally, compared with a target of 5.9 per cent. Fund chiefs also expect to miss targets again this year – forecasting a return of 4.4 per cent on a target of 5.7 per cent.

“What we picked up is that there was no real sense of panic about this,” said Mr Millar, referring to global funds in general.

Globally, the drive to improve returns has led to a shift in how sovereigns are investing. The amount allocated to fixed income investments has plunged – from 25 per cent in 2012 to 16 per cent last year. This was owing to historic low bond yields, with investors seeking greater returns from alternative investments including infrastructure, real estate and private equity, said Mr Millar. The average amount of portfolios invested in property has more than doubled within three years to 6.5 per cent of holdings by last year, up from 3 per cent in 2012. Infrastructure investments doubled to 2.8 per cent in the same period.

Territories in which sovereigns are investing are also changing. Brazil, Russia and China have fallen out of favour but India, Africa and other emerging Asian markets are popular. Middle East funds’ allocations into Africa grew from 1 per cent in 2014 to 2.6 per cent last year, and allocations to Asia grew from 1.5 per cent to 2.3 per cent. Allocations into the United States also grew thanks to favourable changes to tax laws for sovereign investors buying property.

Government central banks are also creating tranches of investment capital to plough into corporate bonds and equities so they can preserve their own capital bases as government bond yields head for negative territory, Mr Millar added.

JP Morgan has said that the amount of government bonds with negative yields has grown to $8.3 trillion, or 31 per cent of its entire government bond index, according to Reuters. German 10-year bonds are now heading for a zero rating, while Japan has issued $5.3tn of negative-yielding bonds.

UAE can attract soverign cash

The UAE’s ranking as one of the top markets for infrastructure competitiveness should make it a target for greater sovereign investment, says Alex Millar, the head of Invesco’s Emea sovereigns division.

Its Global Sovereign Asset Management Study points to World Economic Forum rankings, which place the UAE as joint-third with the Netherlands for infrastructure investment competitiveness. “The UAE is ranked higher than the US for potential investors,” Mr Millar said.

He said that although infrastructure investments are popular among sovereign investors, as it provides long-term, income-generating assets that are generally inflation-proof, these are difficult deals to set up.

The average length of time that it takes for a sovereign fund to deploy capital into an infrastructure investment is 3.5 years, Invesco’s research found, compared with 2.3 years for a private equity investment and just two years for real estate.

Sovereign investors are putting money into their own markets, often as co-investors alongside other funds so that they can spread investment risk.

The UAE is funding the new US$1.4bn Royal Atlantis hotel complex at Palm Jumeirah, and is co-investing with Brookfield Asset Management to build the $1bn ICD Brookfield Place Tower at Dubai International Financial Centre.


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Michael Fahy

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