Perhaps it was the title – “The overflowing bathtub, the running tap and SWFs” – or the attention-grabbing prediction in the opening paragraph:
Assets under management by Sovereign Wealth Funds (SWFs) are set to explode. Under reasonable assumptions we think they will grow by US$1.2tn a year to reach US$7.9tn by 2011, from US$1.9tn currently.
Whatever the trigger, the global economics desk at Merrill Lynch in London, reports more interest from clients in their recent report on SWFs than any other they can recall.
So, in the tradition of good investment banking hackery, global economics team member Alex Patelis has been lent upon to produce some more words.
The SWF put
Investors seem to believe that SWFs will support the price of risky assets. In a way, the SWFs are perceived to be writing a put –akin to the so-called Greenspan put– in the assets that they are most likely to be involved in. This feeds back into markets today and creates the possibility that SWFs end up paying a higher price than otherwise, when they are able to actually deploy their capital.
Calls for transparency are somewhat misplaced, in our opinion, given the enormous size of SWFs as too much information would affect the price of the assets SWFs would invest in.
A torrent of recently announced deals underscore the importance that SWFs have in achieving national strategic objectives in addition to increasing returns and portfolio diversification. It is also our belief that asset allocation decisions are likely to evolve over time, with many SWFs ‘learning by doing’.
Which asset managers?
SWFs are likely to use as external managers firms with a global reach, large proportion of institutional assets, long standing relationships with consultants, long investment track records and those also able to provide intellectual capital transfer in return. We see a strong possibility that an SWF elects to acquire a direct stake in a global asset manager.
As SWF investments generate returns, there will be an increasing temptation by governments to repatriate part of these funds to finance potential budget deficits. SWFs can act as ‘automatic stabilisers’. Over the very long run, repatriation of SWF assets back into their home countries is likely to put significant upward pressure on their currencies.