The “golden age” of sovereign wealth funds has ended, according to academic research that predicts the coronavirus pandemic will result in profound changes for the state-backed investment vehicles.
Sovereign wealth funds, which oversee $6tn globally, are being tapped by governments to stabilise budgets and mitigate the effects of the economic fallout of the pandemic, according to academics at Bocconi University, New York University and London School of Economics.
SWFs linked to commodities such as oil, in particular, are “facing the most severe adverse shock in their history”, with the pandemic adding to problems such as low oil prices and declining hydrocarbon revenues.
“The Covid-19 crisis is a turning point in the history of SWFs. This dramatic, unexpected shock accelerates the pre-existing negative trend of declining oil prices and slowing of global trade, the two main drivers of SWF growth,” said Bernardo Bortolotti, an economics professor and one of the report’s authors.
“SWFs of all stripes will be called to reassess their strategies and accommodate the requests of their sponsoring governments, in spite of mandates and governance arrangements.”
As well as a store of wealth for future generations, SWFs are often used by countries during periods of upheaval. The Kuwait Investment Office, the world’s oldest SWF, played a central role funding the Kuwait government in exile after the Gulf state’s 1990 invasion by Iraq.
The research predicts that rather than focusing on investing globally, as many big SWFs have done in recent decades, the pandemic is likely to mean that the funds become “more leveraged, favour domestic over overseas investment and move beyond purely financial returns to focus on broader economic and social impact”.
The academics said estimating investment losses suffered by SWFs because of the pandemic was difficult, partly because of the opaque nature of the sector, but they suggested the funds faced paper losses of $800bn.
While some SWFs used the coronavirus sell-off as an opportunity to pick up cheap stocks, others had less disposal cash. The research found that some SWFs were being called upon to fill gaps in public budgets as well as support domestic economies through corporate bailouts. Singapore’s Temasek, for example, recapitalised Sembcorp Marine, a domestic shipbuilding and repair conglomerate, for $1.5bn in June, as well as injecting $13bn into Singapore Airlines.
Elsewhere, state funds based in Norway, Iran, Kuwait and Nigeria are facing withdrawals or increased dividend distributions to fund their respective governments.
The research looked at various factors such as a country’s sovereign wealth relative to its borrowing requirements net of oil revenues, and the need to diversify away from commodity resources and debt ratios.
“The survival and future relevance of SWFs in their domestic economies will depend upon their countries’ resilience in the face of the Covid-19 shock and the extent to which their sovereign assets are used as buffers,” the academics said.
A study by Invesco this year also found that commodity-focused SWFs were braced for withdrawals.
“If the crisis drags on and/or lower oil prices persist, funds . . . could be faced with a sustained period of outflows that could see them confronted by much harder decisions and a requirement to sell down other assets, with passive equity allocations the next asset class in line.”
The fund manager said many commodity-based sovereigns had built up large cash reserves to facilitate requests for emergency funding since the financial crisis, as well as focusing more on liquidity management.
