Sovereign wealth funds are turning their focus towards Asia after a trend for investing heavily in Europe came to an abrupt halt in 2010, according to a report by US research and consultancy firm Monitor Group.
The report entitled ‘Braving the New World: Sovereign Wealth Fund Investment in the Uncertain Times of 2010’ analysed the investment behaviour of 30 of the world’s leading sovereign wealth funds.
These included Norway’s $560 billion sovereign wealth fund, Norway Government Pension Global, the $342 billion Abu Dhabi Investment Authority and the $332 billion China Investment Corporation fund.
It found that 2010 marked the ‘beginning of a new pattern of investment’ for sovereign wealth funds (SWFs) as they attempt to deal with new economic realities in the wake of the global financial crisis.
While for the past two years Europe had received the largest proportion of the funds' direct investments, this trend came to an abrupt halt in 2010 as they turned eastwards. The report also found that the global economic environment in 2010, although uncertain, was better than that of 2009 as the funds have turned their eyes toward emerging markets, Asia in particular.
The Asia Pacific region accounted not not only for the largest number of investments, around 40% of those recorded among the 30 funds, but also the largest proportion of recorded value, $25.2 billion which represents nearly half the total.
Within this region, the funds are not only investing in its two largest economies, China and India, but also in nations such as Indonesia, Malaysia and Singapore.
The report also revealed that Latin America, previously a continent in which the research firm had seen very little direct investment from the sovereign wealth investors, has become more popular with funds chasing alpha returns.
The data recovered also suggests that commodities and other alternative assets will become an increasingly important asset class for these funds.
Their direct investments in 2010 suggests these funds are developing a ‘clear strategy’ towards the energy, commodities, and industrial sectors, according to the report.
During 2010, the funds' publicly reported direct investments in commodities amounted to 27 deals, valued at $6.9 billion — 13% of their total annual expenditure, and 16% of the total annual deal volume.
‘Returns on many traditional asset classes are currently depressed and seem likely to remain so, particularly developed market equities and government bonds,’ said Victoria Barbary, senior analyst at Monitor Group and co-editor of the report.
‘With SWFs keen to make good returns for their sovereign government owners, it may well be that they choose to increase their allocation to alternatives as they look to realign their portfolios with new economic realities.