Azeri Wealth Fund Weighs Portfolio Shakeup as Oil Erodes Assets

  • Sofaz seeks better returns to offset losses from slumping oil
  • Fund diversified portfolio by investing in yuan, real estate

The State Oil Fund of Azerbaijan is considering a change in its investment portfolio next year to boost returns as slumping crude prices drain its assets.

The Baku-based fund, known as Sofaz, “is seeking to shift to an optimal investment portfolio in the long run to increase returns,” Deputy Executive Director Israfil Mammadov said Tuesday by e-mail. “The fund is constantly exploring opportunities in this area. It is considering revising the allocation of the current investment tools.”

Oil exporters are struggling to adjust to crude’s slump of more than 40 percent in the past year, with countries from Norway to Saudi Arabia tapping wealth funds accumulated during the boom years to bolster their budgets. As Sofaz looks to reap better returns, this year it started to invest in the Chinese yuan and clinched its first property deal in Japan with a 52.3 billion-yen ($426 million) joint purchase with Mitsubishi UFJ Trust and Banking Corporation. The Azeri fund began diversifying its portfolio in 2012 by adding gold, equities and real estate.

Sofaz, with $34.7 billion in assets, may raise its allocation for equities in the coming years beyond the current 10 percent limit, Bahruz Bahramov, head of the fund’s risk management department, said last week.

Assets Shrink

Established in 1999 to manage income from the sale of crude oil and natural gas by the former Soviet Union’s third-largest crude producer, Sofaz’s assets fell 6.9 percent in the first nine months from a year earlier. It had 87.5 percent of assets invested in fixed-income securities at end-2014, 6.5 percent in equities, 2.9 percent in real estate and 3.1 percent in gold, according to its website.

Sofaz has said it expects a further decline in assets next year as the projected spending of 8.3 billion manat ($7.9 billion) will exceed revenue of 6.71 billion manat. Most of the income is transferred to the national budget and also used to finance infrastructure projects.

Azerbaijan, which was forced to devalue its currency by about 25 percent in February, is looking to reduce transfers made by Sofaz into the state budget. The fund, whose assets are equivalent to more than half of gross domestic product, is one of only three earners of foreign currency for the country, according to central bank Governor Elman Rustamov.

Budget Transfers

Last year, it contributed 9.3 billion manat to the budget, or almost 51 percent of revenue. Its transfers are set to shrink to 6 billion manat in 2016, according to the Finance Ministry. Azerbaijan is basing its 2016 budget on the assumption of an average oil price of $50 a barrel, down from $90 a barrel this year. Oil and gas account for 95 percent of exports and 70 percent of government revenue, according to the World Bank.

The proposed changes to Sofaz’s investment portfolio, along with its draft budget for next year, have been submitted to President Ilham Aliyev for approval, Executive Director Shahmar Movsumov told APA news service in a Nov. 21 interview. Movsumov said the changes can be approved within two weeks.

Before it's here, it's on the Bloomberg Terminal.