As investors continue to flee risky assets amid crisis in the US leveraged loan market, analysts caution that the projected boom in global equity stakes by sovereign wealth funds is now in doubt. They also warn that the opportunities for western fund managers to allocate a portion of such funds will be limited.
“With increased market vulnerability due to the current credit crunch, there is significant scope for doubt that sovereign wealth funds will drive major capital into global equities as initially thought,” Diana Choyleva, chief economist at Lombard Street Research told Emerging Markets. Lombard Street specialises in the analysis of international capital flows.
Derek Wang, research director at Z-Ben advisors, a Shanghai-based investment management consultancy, argued that China might shun riskier assets in the current ominous climate. He highlighted the disappointing results from the State Investment Corporation’s (SIC) investment in Blackstone, the US private equity firm.
“Blackstone shares have plummeted dramatically in such a short time, so with any future investments, the authorities are very likely to be more cautious,” Wang told Emerging Markets.
Eyebrows were raised when SIC bought an aggressive 10% stake in the firm in late May 2007. Already, 18% of SIC’s $3 billion investment has been lost since the firm went public in June, amounting to $540 million.
SIC is mandated to invest about $200 billion of the country’s $1.3 trillion foreign exchange reserves and will manage an unspecified portion of those accumulated in the future. Since reserves are growing at staggering $40 billion per month, western portfolio managers are salivating over the prospect of managing such funds.
George Hoguet, portfolio manager and emerging markets investment strategist at State Street Global Advisors, sees an opening due to the underdeveloped conditions in China’s domestic fund management industry.
“This is a tremendous opportunity for external asset managers. Soon the Chinese will hire western money managers and this will give a significant boost to the industry. China-US trade tensions are currently increasing, so the advantage of using outside managers is that it allows them to avoid these political problems through investing in the US indirectly,” Hoguet told Emerging Markets.
Not so fast, warned Wang, because SIC does not follow the conventional structure of western pension funds that allocate clear mandates to asset managers. Instead, the fund’s broader objectives, design and structure will be subject to continual evaluation by the Chinese authorities. As a result, Wang expects the agency to operate without significant input from third-party asset managers, until it has gained organisational maturity and sophistication.
“Western fund managers may be eager to get a piece of the cake but the Chinese government will be slow to dish it out. Organisation of the fund is likely to be persistently re-evaluated, unlike pension fund structures, which makes the role of a western fund manager more difficult,” said Wang.
Choyleva was also cautious on the use of foreign expertise. She argued that seeking strategic investments with national economic benefits may be more important for the authorities than finding the most successful portfolio fund managers.
“These funds are not underpinned by a philosophy of maximising shareholder value, instead the authorities have political considerations. So I doubt they would release any significant control to outside fund managers.”