Sovereign Wealth Funds

Written By Brian Hicks

Posted April 17, 2008

Sticker shock. That’s what I felt this morning as I filled up my gas guzzling SUV. Twenty-two and a half gallons later, I had been fleeced for some $77.

Then again, it has been a long time since a full tank was only a fin. That’s a fiver for all you that were born since Jimmy Carter sat in the White House.

The problem is that by the time summer arrives, I’m afraid that it’s only going to be much worse at the pumps.

Peak oil or not, high gas prices are just something that we’re all going to have to learn to live and deal with. And the reason for this is quite simple.

Skyrocketing demand from emerging economies is far outpacing the supply of crude oil, which has been flat now for about three years. That, along with a falling U.S. dollar has helped to push crude to a series of new all time highs.

And it’s not about to end anytime soon.

But like any other trade, there is always the other side of the deal. Our pain, in a sense, is the OPEC’s gain as they continue to stockpile massive amounts of petro-dollars.

That’s one of the major factors in the continuing and unstoppable rise of Sovereign Wealth Funds. The second is the dramatic international trade imbalances that continue to pour cash into the coffers of the foreign nations that enjoy them-countries like China.

Taken together, these are the factors that have helped to push over $3 trillion dollars into these super-funds, making them an increasingly powerful force for global markets.

In fact, these imbalances are now so profound that the U.S. Treasury estimates that the capital accumulated by these sovereign wealth funds will grow to over $15 trillion by 2016.

So what is a Sovereign Wealth Fund?

Well, to put it simply, Sovereign Wealth Funds are something of a national savings account for the countries that enjoy them. But they are not passive accounts by any stretch of the imagination. They are owned and organized into a state-controlled fund and put to use to earn higher returns on investment.

It’s no different really than what an individual investor does all of the time, but on a massively larger scale.

And while the funds themselves are not new, how they invest all of those dollars is rapidly changing.

That’s because one of their more traditional investments-like U.S. Government Bonds-have fallen on hard times.

After all, with inflation running at a 4% clip and yields on U.S. Treasuries generally well below that figure, government bonds have become a losing investment for the funds.

Add in a falling U.S dollar to the mix and a central bank that is only primed for more rate cuts and the investment return on U.S. government bonds only looks worse.

So to beef up their returns, many world governments are increasingly moving vast amounts of their money into the global equity markets.

It’s something that I wrote about last year in an article entitled: The Most Dangerous Man in China.

The article discussed China’s apparent shift away from U.S. Treasuries and into equities in the aftermath of their $3 billion bet on the Blackstone Group, a private equity firm. It was sign of things to come.

But China, in this regard, is only one of the players seeking higher returns in equities.

Many of the largest Sovereign Wealth Funds are controlled by oil-rich countries like Norway and the Gulf states. Asian countries such as Singapore, whose trade surplus has built up a big stash of foreign exchange reserves, also oversees big sovereign funds.

Investing such a big stash of cash, however, has its share of problems. Big moves by these funds can distort the markets if they aren’t handled properly.

That means that these funds can generally only accumulate shares of the largest, most liquid companies around the world. These blue-chips are the only ones that can absorb buying on the scale that these funds typically engage in. Otherwise, they would blow out the share price.

Following Sovereign Wealth Funds to Profits

One way, of course, for retail investors to cash in on this trend is by following this flood of recycled dollars. And it’s easier than you think.

Instead of trying to figure out which of blue-chips these funds may be buying, buy a piece of them all.

Invest in the SPDR DJ Global Titans ETF (AMEX: DGT). The fund holds 50 of the world’s biggest publicly traded companies. That automatically puts you in the very businesses that these funds will be buying.

Now whether or not any of these Sovereign Wealth Funds present a greater danger is a matter of increasing debate.

Nonetheless, it would be disingenuous to say that we haven’t needed their help lately. Because to date, these funds have invested more than $60 billion in U.S. and Swiss banks the since the mortgage crisis began. That alone has saved investors more money than they can probably appreciate.

Meanwhile back at the pump, the national average price of a gallon of regular unleaded gas rose 1.3 cents yesterday to a record $3.399 a gallon, according to a survey of stations by AAA and the Oil Price Information Service.

That’s 53 cents higher than a year ago, and it is expected to keep climbing as the summer driving season draws near.

But don’t forget the other side of that trade in your pain. Sovereign Wealth Funds are an unstoppable part of the global market.

Your slightly poorer but looking for ways to make it up analyst,

steve sig

Steve Christ

Chief Investment Analyst

The Wealth Advisory


By the way, membership to The Wealth Advisory seems to be growing as fast as those foreign funds these days. Last week’s special offer was a huge success. Thank you to all of those who signed up. To join them and begin beating the bear market for a change, click here.

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