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Are sovereign wealth funds stupid?
18 Jun 2008
They’ve lost tens of billions of pounds pouring money into the likes of UBS, Citigroup and Merrill Lynch, and they’re still back for more.

Barclays is said to be close to raising £4bn from unknown sovereign sources, thought to include the likes of Singapore’s Temasek and China Development Bank.

But China Development Bank has already lost money on the 3% stake it took in Barclays last year. And Temasek is nursing a hefty loss on Merrill shares, which have fallen around 25% since it purchased them last December.

It’s clear why banks are courting sovereign investors – existing shareholders have got cold feet when it comes to rights issues, and bringing in an investor from Asia can be dressed up as a strategically advantageous move.

But why would a sovereign fund want to pour its money down the drain? Some say sovereign funds lack the talent to identify better investment opportunities. Is this the case, or do they know something we don’t?

Related Articles:
Sovereign wealth funds will leave you out of pocket
Jobs at the sovs (sovereign wealth funds)
Investing for the state
Related Links:
Reuters: China says sovs are a force for good
Financial Times: Sovereign funds consider Barclays stakes
Wall Street Journal: Where will US banks beg next?
Reader Comments
Date: 18 Jun 2008
Name/Email: Alex Lim ()
Company:
Just an opinion, one of the many reasons may be that the SWFs from Asia and the Middle East possess the highest amount of foreign reserves in the world. they cannot pump everything into infrastructure or their internal economy. so external is the natural way to go. The investment banks probably spot this as one of the reasons for soliciting the help of these SWFs. in any way, this is a win-win situation if the dire straits of the investment banks can be avoided and their balance sheets recover.

Date: 18 Jun 2008
Name/Email: Sid ()
Company:
Sovereign wealth funds are the aged relatives of the investment space: rich, slow, and more than a litte dissassociated from reality. If they paid reasonable money they might be able to hire a few people to point out that the Western financial system is in the throes fo a crisis that's far from over and investing again at this stage is tantamount to throwing all their cash in a hole.

Date: 18 Jun 2008
Name/Email: Karen Dahl ()
Company:
Sovereign Wealth Fund administrators are aware of the demise of the western economy and financial administrative systems. High wages for number crunchers do not real money generate and the days of relying on spurious non-creative money moving strategies by overpaid clerical bankers are numbered. Financiers quite rightly need to see creative banking strategies rooted in creative and worthy investment.... New ideas and tangible support for sustainable business/banking and appropriately managed investment for a renewed sustainable global economy need to be initiated. Sustainability is the keyword, with particular focus on sustainable environmental practices. From that all good may grow.

Date: 20 Jun 2008
Name/Email: Gao ()
Company:
Dismissing sovereign funds as stupid shows a lack of appreciation of their importance to the world financial system. Yes they've lost some money, but do they care? No. The amount they've lost is peanuts to them. At the same time they've helped Western institutions who would surely have collapsed without their assistance. We should be thanking rather than insulting them.

Date: 22 Jun 2008
Name/Email: Mr ()
Company:
Morgan Stanley estimates that sovereign wealth funds have invested $113bn in financials so far. But their total funds are thought to total $3.3 trillion to invest. Goes to show that this is just a drop in the ocean to them.

Date: 22 Jun 2008
Name/Email: JJ ()
Company:
These funds see banks as a long term investment. Citigroup's shares are lower than they've been for ten years. They may look stupid now, but this won't be the case once financials come out of their current slump.

Date: 24 Jun 2008
Name/Email: Mark ()
Company:
It is just a case of finding somewhere to put it all. Also they can take a very long-term view. Something that has always paid off under any circumstances if you are reasonably diversified.

Date: 24 Jun 2008
Name/Email: ex SWF ()
Company:
They have a long term view and if you have an investment period of 10 years, you are bound to be ahead - even if you did buy Citi stock. Having said that they are not the fastest around the block either..

Date: 26 Jun 2008
Name/Email: fatexpatinthesun ()
Company:
having worked closely with a number of SWF during my time in the industry I know that they employ some top end talent at the moment, not just aged expats looking to while away their remaining years in the sun earning a fat pay cheque for little input. These funds now more than ever are making strategic plays with their reserves. as pointed out above they can afford to take a very long term view and have the kind of liquidity at their disposal that has our distressed financial instituitions falling over one another to welcome onto their books. Ultimately the financial sector greases the wheels of the entire global economy and when we move back into the boom times, these investors will be laughing all the way to the...........

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Poll
The likelihood of writedowns spreading to corporate debt is:
Very, very low: 4.9%
Lowish: 26.2%
I don't know: 18.6%
Very high: 32.4%
Very, very high: 17.8%
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