SWFs: Up in a Downturn?

Ashby Monk

SWF assets under management grew to nearly $4 trillion in 2008, which represents an 18% increase year on year. Considering the financial turmoil and plummeting commodity prices, this is more than a little surprising.

It is safe to assume that this asset accumulation wasn’t achieved through investment returns. Rather, the increase in assets came from new SWFs (such as creation of Russia’s National Welfare Fund) and rising foreign exchange reserves in China.

With the crisis continuing apace, I expect this increase will be followed by a drop over the next few years. Simply put, the crisis means that countries will be tapping their SWFs, which are in many cases the ‘insurers of last resort’. Indeed, Singapore is tapping its reserves for the first time in the country’s history to boost the domestic economy. Also, China has another large domestic stimulus planned. In addition, oil prices remain low, and financial markets have not yet recovered. While the current low market prices may offer long-term investors buying opportunities, the political will to invest government owned assets in financial markets may have waned in view of the losses incurred over the past 18 months.

I expect 2008 to be the high water mark for SWF assets under management this decade.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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