Sovereign Wealth Fund Weekly News Roundup — Oil Slump Weighs on SWFs

September 18, 2015 by Loch Adamson

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The decline in energy prices continues, affecting sovereign wealth funds’ balance sheets. Elsewhere, NZ Super posts impressive annual results and SWFs pour yet more capital into real estate and infrastructure assets.

Oil Crash Hurts Russia...

The meltdown in oil prices that began in mid-2014 has presented sovereign wealth funds with some daunting challenges. Most SWFs already have diversified portfolios, and few rely on oil revenue for their ongoing funding streams, so there’s been little panic selling as of yet. Nevertheless, the ongoing energy-price slump is starting to tell on some funds’ balance sheets.

Take Russia. This week Finance Minister Anton Siluanov confirmed the government will withdraw around 2.5 trillion rubles ($37.9 billion) from its Reserve Fund in 2015, despite a reduction in budgetary spending. Russia's economy has been hit by Western sanctions as well as the decline in oil prices, and the government has been tapping the Reserve Fund since last year for capital to finance infrastructure projects and prop up Russia’s ailing financial institutions.

That’s not necessarily a problem — the Reserve Fund is a stabilization vehicle, designed to support the economy at times of need. More concerning, however, are the ongoing withdrawals from the National Wealth Fund, which is mandated to backstop the country’s pension system. Siluanov said he wants to keep the combined value of the funds above RUB 2 trillion by the end of 2018. Given that their assets stood at RUB 8.5 trillion ($147.5 billion) as of July 1, 2015, the government could be preparing to withdraw up to RUB 6 trillion over the next two years.

...and Abu Dhabi...

Mubadala Development Co. has also been affected by the fall in energy prices. This week the sovereign development fund released its first-half financial statements for 2015, which revealed that its profits fell more than 50 percent year over year. The fall was largely due to lower income from its oil and gas businesses; Mubadala disclosed that it received only AED 2.4 billion ($653 million) from sales of energy products over the first six months of 2015, down 17 percent on the same period last year. The fund’s total assets stood at AED 241.7 billion ($65.8 billion) as of June 30, down from AED 243.6 billion as of December 31, 2014.

...and Azerbaijan...

The $35.7 billion State Oil Fund of the Republic of Azerbaijan (SOFAZ), meanwhile, will reduce the amount it transfers to the government next year due to declining national oil revenue. According to the Ministry of Finance, SOFAZ will transfer 6 billion manat ($5.6 billion) to the government's main budget in 2016 — 42 percent less than the 2015 transfer.

...But NZ Super Surges

Not all sovereign wealth funds are struggling. The $20 billion New Zealand Superannuation Fund announced its results for fiscal 2015 this week — and they reveal the fund delivered a return on investment of 14.64 percent over the 12 months through June 30. Chairman Gavin Walker attributed the fund's strong performance to its strategic tilting strategy, which enables its managers to 'tilt' the balance of the portfolio in the short term when they believe a particular asset is cheap or expensive. The strategy is working extremely well: Over the past five years, NZ Super's portfolio has achieved an annualized return of 16.8 percent. 

Hunt for Hard Assets Continues

Sovereign wealth funds continue to plow billions into real estate and infrastructure assets, attracted by the stable long-term cash flows they offer.

This week a joint venture between Norges Bank Investment Management (NBIM), the arm of the central bank that manages Norway's $870 billion sovereign wealth fund, Government Pension Fund Global, and New York-based financial services firm Teachers Insurance and Annuity Association – College Retirement Equities Fund (TIAA–CREF), bought an office building in central San Francisco for $307.1 million.

The $747 billion China Investment Corp. reportedly teamed up with government-owned logistics group China Ocean Shipping Company (COSCO) and China's largest port operator, China Merchants Group, to buy a 65 percent stake in Kumport, a Turkish seaport, for $2 billion.

And the $11.1 billion Bahrain Mumtalakat Holding Co. has announced it will develop a luxury waterfront resort on artificial island Durrat Al Bahrain as part of its joint venture with Minor Hotel Group (MHG). The two investors will operate the 220 room- facility under the Anantara Hotels, Resorts and Spas brand.




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