A sage commenter once suggested that this blog should be titled follow the money – since it has focused, more than anything else, on trying to understand how the US finances its large current account deficit.
About two years ago, that quest took me to the world’s oil exporting economies. In 2005 and in 2006 their external surpluses topped China’s surplus, and they added more to their reserves and official assets than China added to its reserves and investment funds. China will regain the lead in 2007 – the oil exporters cannot match half a trillion dollars. But they still have a lot of cash to invest.
The US data – whether the TIC data or the survey data – doesn’t really tell us much about what the oil exporters are doing with their money, or rather it tells us that they are investing the funds in ways that don’t register in the US data.
But over time, the flow of petrodollars has started to make some sense.
We know for example, that Russia’s central bank manages Russia’s oil fund. While Russia has dramatically reduced the dollar share of its reserves, even 50% of $400b plus works out to a substantial sum. Russia, though, has invested its dollars and euros very, very conservatively. That may change next year, when Russia’s stabilization fund is split into two.
Other oil exporters -- Libya for example – have also been fairly conservative. Libya seems to have a lots of funds on deposit in Europe.
But setting Russia aside, the really big money is in the Gulf. And thanks to the reporting of the Wall Street Journal's Henny Sender and a nice synthesis piece by James Mawson and Renée Schultes the way the Gulf manages its money is starting to come into better focus.
My friend Ramin Toloui has shown that most of the Gulf’s assets are held by investment funds, not central banks. These funds have certain common features – they all seem to have increased their investment in Asia, for example. But each fund also seems to have its own style.
Qatar’s investment authority, for example, increasingly wants to be a private equity fund – not just invest in private equity funds.
Dubai international capital is a private equity fund -- not a sovereign wealth fund. At the same time, the line between private and public wealth is a bit blurry when a fund manages the "private wealth" of the country's ruling sheik.
Kuwait’s investment authority, which Henny Sender profiled in Friday’s Wall Street Journal, seems a bit more conservative. While Kuwait is certainly not a democracy, their investment fund does have to report to Kuwait’s parliament. Sender:
Although Kuwait has an emir, it also has a parliament, whose members often question the investment authority's executives about their holdings.
As a result, KIA is more transparent than other funds in the region – indeed, I would say it is second only to Norway when it comes to transparency, though the competition for second isn’t very strong.
KIA still keeps (old) bankers hours: Senders reports the AC shuts down at three, and the parking garage closes at 4. But KIA also isn’t as sleepy as it was five years ago. Indeed, in 2003, Senders reports that the bulk of its assets were in Treasuries (though it also seems to have had some equity exposure):
Mr. Al-Sa'ad [the manager of KIA] learned that Yale was 28% in stocks, 17% in private-equity funds and 20% in real estate at the time. Kuwait was 2.5% in real estate and 1.5% in private-equity funds. The bulk of its money was in U.S. Treasurys. Despite that hoard, the fund had enough losses elsewhere that its returns were negative in 2001 and 2002, Mr. Al-Sa'ad says.
KIA subsequently has shifted from US Treasuries towards global equities -- and private equity -- over the past few years. And it also clearly has shifted toward Asia. Sender:
The recent troubles in U.S. and European financial markets confirmed him in his view that emerging markets, especially in Asia, hold greater promise. He has made some big investments in China, including $700 million in Industrial & Commercial Bank of China in 2006. …. Mr. Al-Sa'ad is cutting the portion of the portfolio invested in the U.S. and Europe to less than 70% from about 90%. "Why invest in 2%-growth economies when you can invest in 8%-growth economies?" he asks.
As Mr. Al-Sa'ad moves away from assets priced in dollars, the euro and the pound sterling, he is moving toward the South Korean won, Malaysian ringgit and Indian rupee. The yen is his least-favorite currency.
The shift to Asia, though, still seems to be a work in progress. Notice the worlds “is cutting” not “has cut”. The surge in ICBC’s value no doubt helped accelerate the rebalancing of the Gulf' portfolio.
30% of a $200b portfolio is $60b – it is a substantial chunk of change.
But it is nothing like what the Abu Dhabi Investment Authority (ADIA) likely has invested outside the US and Europe. ADIA is absolutely enormous – its assets dwarf those of Russia and Kuwait. Most of ADIA’s vast funds are managed externally. That is one reason why they don’t appear in the US data. And so far it has been quite happy not to try to be a private equity fund – though it has given large sums over to private equity funds to manage, and recently bought an equity stake in one of its fund managers.
ADIA has long had a relatively large share of its portfolio in equities – larger, I suspect, than the other Gulf funds. Its other distinguishing feature – setting its size and secrecy aside – seems to be its willingness to invest in the emerging world. It probably has more money invested in the emerging world than any other single institution – the 15% share of its equity portfolio in the emerging world in early 2006 likely has gone up.
So what are the big mysteries that remain?
One is just how far ADIA has gone in diversifying its portfolio away from dollar based assets. KIA has indicated that it aims for the composition of its portfolio to roughly match a region's share of world GDP. ADIA hasn't -- to my knowledge -- made a similar statement.
ADIA is so big that it in some sense drives the data for the entire Gulf. If ADIA has only a third of its assets in dollars, it is pretty hard to see how the Gulf as a whole has 60% of its assets in dollars (as the IIF estimates).
Another is whether the Saudis have moved the same broad direction as Kuwait’s investment authority. The Saudis don’t have an investment fund per say, but their central bank has large holdings of non-reserve foreign assets. It isn’t clear whether SAMA still holds a portfolio that looks like a typical central bank portfolio (mostly Treasuries and Agencies) or whether it has taken on more risk. SAMA supposedly has some equity holdings, but it isn't clear what share of its portfolio is now managed more aggressively.
I assume that SAMA also continues to hold far more of its assets in dollars than any of the big investment funds, but I wouldn’t mind being able to confirm that assumption.
The final mystery from the Gulf: just how much have the leading Saudi families invested on their own? ADIA seems to pretty much have all of Abu Dhabi’s money. SAMA manages the reserves – including the fiscal reserves – of the government of Saudi Arabia. But it doesn’t seem to manage the “private” funds of Saudi royal family.
And then there is a mystery that has nothing to do with the Gulf. Of all the various models for investment funds out there -- models range from those in the Gulf to Norway's exemplary Government Fund and Singapore's GIC and Temasek -- which one will China chose to emulate?