Sovereign Funds’ Assets to Gain 60% by 2016, UBS’s Castelli Says

Sovereign wealth funds will increase their assets by 60 percent over the next three years, bolstered by rising income from commodities and exports, according to UBS AG.

State funds will manage about $8.6 trillion in 2016, up from $5.3 trillion now, according to Massimiliano Castelli, head of strategy at Global Sovereign Markets, the unit of UBS Global Asset Management that services sovereign institutions worldwide. Sovereign investors will also add more assets in emerging markets and cut holdings denominated in currencies such as the euro and the Japanese yen, he said.

“The main drivers of this growth are commodity prices, expected to remain at current levels over the next few years, and continuing current account surpluses of exporters,” Castelli said in a March 11 interview from Zurich, where he is based. There’s also a “rising number of new state funds being established,” he said.

Assets managed by sovereign wealth funds have risen fourfold in the past decade, making these state-owned investment vehicles bigger than private-equity and hedge funds combined, according to TheCityUK. The assets held by sovereign investors will gain about 8 percent this year, according to the London-based group, set up to promote U.K. financial services.

The price of oil has more than quadrupled over the past 10 years, raising the revenue of exporting countries such as Norway and Kuwait. Norway’s Government Pension Fund Global is the world’s biggest sovereign wealth fund with $716 billion, and the Kuwait Investment Authority has $296 billion of assets under management, according to the Sovereign Wealth Fund Institute.

Oil Prices

Brent crude, which is used as the price benchmark for more than half of the world’s oil, rose from an average $25.03 a barrel in 2002 to $111.68 last year. It will cost between $110 and $111.50 a barrel from this year until 2016, according to the median estimate of 10 analyst forecasts compiled by Bloomberg.

The pace at which new sovereign funds are being set up may accelerate, which will also contribute to the increase in the assets of the state funds, Castelli said.

“We are seeing many funds being established in Africa, where Nigeria and Angola have set up those investment vehicles and Mozambique is considering starting a fund,” Castelli said. “In Latin America, Columbia is creating a state fund and Peru may follow suit. In Asia, Mongolia is starting a fund and the Philippines are pondering setting one up.”

Peru’s Finance Minister Miguel Castilla said in October the government is looking at ways to invest more savings abroad, including a sovereign wealth fund.

State funds are adding more emerging-market assets and cutting their allocations to major currencies, Castelli said.

Stocks, Bonds

“This is true either for fixed income or for equities,” said Castelli, who co-wrote the book The New Economics of Sovereign Wealth Funds. “That also means that sovereign wealth funds will be more and more going into currencies other than the yen, the euro, the dollar or the pound.”

Developing nations, led by Venezuela, made up eight of the 10 best-performing stock markets this year, according to data compiled by Bloomberg. The Brazilian real and Mexican peso were the best performers among 16 major currencies tracked by Bloomberg, while the yen and pound had the biggest declines.

Norway’s Government Pension Fund Global reduced its holdings in French and U.K. government bonds by almost half last year while adding investments in Turkey, Russia and Taiwan. Cutting dollar, yen, euro and pound investments was a “prudent” move as the currencies “have structural issues,” Yngve Slyngstad, chief executive officer of Norges Bank Investment Management, which manages the fund, said March 8.

Key Currencies

Central banks may shift their investments away from the key currencies, Castelli said. He didn’t have a breakdown of sovereign funds’ holdings of major currencies.

“About 70 to 80 percent of foreign-currency reserves are still invested in the euro, the dollar and the yen, with the dollar accounting for the lion’s share of it,” he said. “I wouldn’t be surprised if that percentage goes down to about 60 percent over the coming years.”

The wealth funds are also adding investments in real estate, infrastructure and private equity, he said. Still, he expects sovereign firms to take a long-term view.

“You don’t want to invest in today’s hot asset class but you want to invest in those countries, regions and sectors which have the highest potential over the next decade,” he said.

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