Investors around the world are showing renewed interest in sovereign wealth funds, state funds that invest public money in a range of assets, according to a new survey from Hill & Knowlton and Penn Schoen Berland, both research and communications firms.
However, U.S. investors are more skeptical of the sovereign wealth funds (SWF) than other global investors, the survey concludes. Also, concerns about the funds’ financial transparency could hinder their growth as the world recovers from a deep economic crisis.
Globally, sovereign wealth funds are worth an estimated $3.5 trillion, nearly twice the size of the hedge fund segment, notes Sebastian Vos, head of competition practice for Hill & Knowlton in Brussels. The largest fund belongs to Abu Dhabi, with assets valued at up to $900 billion, says Vos.
But the funds have a long way to go to convince U.S. investors to regard them with more enthusiasm. “At a period in time when investment is critical to help stimulate job creation and support economic recovery in the U.S. and abroad, our study demonstrates that many in the U.S. are not familiar with SWFs as a source of stable, long-term capital,” says Paul Taaffe, global chairman and chief executive officer at Hill & Knowlton.
“If SWFs want to execute a diversified investment strategy that includes opportunities in the U.S., it is critical for them to communicate their long-term approach and be more transparent in their holdings,” says Taaffe.
Interviews were conducted in seven international markets about attitudes toward the sovereign wealth funds of 19 countries. In all, there were 1,064 responses, according to Hill & Knowlton. Results showed that the economic recovery stimulated interest in the funds, and more than half of respondents, 51%, said they held more favorable views toward the funds since the global downturn.
On the other hand, 14% were less favorable to sovereign wealth funds, and 36% said their views had not changed. Percentages were rounded off. Respondents in the U.S. and Germany were guarded toward the funds, with just 29% of U.S. respondents indicating they were more favorable to the investments.
“The economic downturn has created a real opportunity for sovereign wealth funds,” says Joel Levy, CEO of Penn Schoen Berland. Despite their concerns over transparency, the respondents did not link the funds with recent market turmoil. “This puts sovereign wealth funds in a prime position to consider their positioning and reputation in contrast to other funds and asset classes,” says Levy.
Risk of political influence
Some survey participants, particularly in Brazil, India, and China, expressed interest in the funds but also were cautious about investment in their countries. The respondents were concerned that the funds could be used to exert political influence and acquire strategic assets.
Sovereign wealth funds in Russia, China and Libya were considered most likely to be motivated by political objectives. Overall, respondents opposed investments in their defense sectors, while welcoming investments in technology, construction, and energy.
Sovereign wealth funds attract long-term investors, says Jim Cox, senior vice president at Hill & Knowlton’s corporate practice. Among U.S. respondents, the top investment choice for the funds was real estate, says Cox.
“We basically asked them, if there was a sovereign wealth fund in the U.S., where you be more comfortable with it? Number one in terms of comfort in the U.S. was real estate.” The respondents also singled out retail as a preferred SWF investment.
Hill & Knowlton currently represents some sovereign wealth funds, says Cox. “We have been involved with real estate transactions in the past.” However, the survey was conducted on a global basis, he says.
In the survey results, transparency and accountability were noted as the most important factors in deciding whether a fund should invest in a respondent’s country. Sovereign wealth funds from Norway, Singapore and Hong Kong scored high on transparency of financial records, effective governance and political stability.