Point of View - Global Investment Solutions from Northern Trust

Voices: James D. McDonald

A review of current activity in global financial markets, with an emphasis on U.S. markets.

Today, and over the foreseeable future, a series of events — call them global megatrends — will have a profound impact on the world economy. Each issue of Point of View will share insight into these trends and how the institutional investment community is preparing to address them.

Sovereign Wealth — Investments*
Sovereign-controlled investments have been the subject of growing attention, and concern, among politicians, the media and other investors in recent years. To address some of these concerns, the International Monetary Fund is expected to release a voluntary code of conduct for SWFs by October of this year.

Enlarge

Source: Global Insight Inc.

Sovereign Wealth
Regional Origin: 2007
Although SWFs often are associated with oil-exporting countries, Asia represents the lion’s share of sovereign wealth. China accounts for about half of the region’s SWF assets.

Sovereign Wealth Regional Origin: 2007

Source: Global Insight Inc.

The Different Faces Of Sovereign Wealth
There are four sources of sovereign wealth, each with its own investment objectives and strategies.

Official reserves: External assets controlled by finance ministries and central banks for direct financing of international payment imbalances. Reserves are invested in highly liquid and marketable securities, such as highly rated government bonds of industrialized countries.

Public pension funds: Assets set aside by a government to meet future entitlement obligations to its citizens. Public pension funds are denominated and funded in the local currency, usually with relatively low exposure to foreign assets. Overseas investing, however, is expected to increase.

State-owned enterprises: Companies that are significantly state-controlled, through full, majority or large minority ownership. The companies can undertake foreign investment. This category includes a wide variety of entities, including manufacturing and financial firms.

Sovereign wealth funds: Government investment vehicles funded by foreign exchange assets and managed separately from official reserves. SWF managers typically have a higher tolerance for risk and seek higher returns than official reserve managers.

Source: “Public Footprints in Private Markets: Sovereign Wealth Funds and the World Economy,” by Robert M. Kimmitt, deputy secretary of the U.S. Department of the Treasury, Foreign Affairs, January/February 2008, published by the Council on Foreign Relations.

The Changing Nature of SWFs
SWF assets are projected to reach almost US$12 trillion by 2015, but the dominance of oil-exporting countries is expected to wane during the same period.

Enlarge

Source: Morgan Stanley Research Estimates

Related Links

Council on Foreign Relations
Reports, articles and other information on sovereign wealth funds.

International Working Group of Sovereign Wealth Funds
A group of International Monetary Fund member countries working on a set of voluntary practices and principles for sovereign wealth funds.

Past performance is not necessarily a guide to the future. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Index performance is based upon information provided by the index providers. There are risks involved with investing, including possible loss of principal. There is no guarantee that the investment objectives of any fund or strategy will be met. Risk controls and asset allocation models do not promise any level of performance or guarantee against loss of principal.

Northern Trust Global Investments (NTGI) comprises Northern Trust Investments, N.A., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., the investment advisor division of The Northern Trust Company and Northern Trust Global Advisors, Inc., and its subsidiaries.

This material is directed to eligible counterparties and professional clients only and should not be relied upon by retail investors. For Asia Pacific markets, it is directed to accredited investors, institutional investors, expert investors and professional investors only and should not be relied upon by retail investors. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy or product described herein. This information is not intended as investment advice and does not take into account an investor’s individual circumstances. Opinions expressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, but its accuracy and interpretation are not guaranteed.