A Review of Sovereign Wealth Funds

Sovereign Wealth Funds(SWFs) have become powerful players in the global markets in recent years due to the amount of funds they control. A recent Reuters article mentioned that Norway’s Sovereign Wealth Fund owns 1% of all global stocks. The following is a summary of important points from “Assessment and Outlook for Sovereign Wealth Funds”, Focus, Banque De France. I have also used other sources when required.

The oldest sovereign fund, The Kuwait Investment Authority, dates back to the 1950s while the Abu Dhabi Investment Authority and the Singaporean fund, Temasek Holdings, were set up in the 1970s

What are Soverign Funds?

According to IMF:

“Sovereign wealth funds are defined as special purpose investment funds or arrangements, owned by the general government. Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatisations, fiscal surpluses, and/or receipts resulting from commodity exports.”

SWFs are of two types:

Commodity funds (or stabilisation funds) manage the guaranteed revenue of commodity-exporting countries oil, gas, precious metals, etc.).

Non-commodity funds manage the resources derived from current account and financial account surpluses or budget revenues.

The size of sovereign funds grew spectacularly over the pas few years upto 2008 due to the rise in commodity prices (mainly oil and gas) and the conjunction of macro-economic factors and foreign exchange policies for non-commodity funds.From about $500 B at the start 1990 the asset size of the 10 largest funds increased to over $3T by early 2008.

The Ten Largest SWFs:

Click to Enlarge

Top-10-Sovereign-Funds

The annual growth rate of SWFs could reach 10% to 20% between 2008 and 2012, with outstanding amounts between $5T and $10 T.

Ten of the Largest and Most Liquid Chinese Stocks

To identify the most liquid Chinese stocks traded in the Hong Kong Exchange we can use the iShares FTSE/Xinhua China 25. This tracks the FTSE/Xinhua China 25 index and offers exposure to 25 of the largest and most liquid Chinese stocks. The index is market capitalization index subject to a 10% weighting cap.

The Top 10 Holdings in iShares FTSE/Xinhua China 25 are:

China Construction Bank (OTC: CICHF.pk)
China Mobile Ltd (CHL)
Ind & Comm Bk Of China
China Life Insurance Co (LFC)
Bank Of China Ltd (OTC: BACHY.pk)
CNOOC Ltd (CEO)
China Merchants Bank (OTC: CIHKF.pk)
Bank Of Communications Co
China Shenhua Energy Co
BOC Hong Kong Holdings Ltd

Note: Data as of June 30, 2009

Based in Hong Kong, China Mobile Ltd (CHL) has a huge subscriber base. At the end of May this yea, the company had 488M subscribers. The current dividend yield is 3.7% and the average annual earnings growth is about 22%. The beta is 0.9.

China Life Insurance Co (LFC) offers individual life insurance, group life insurance, accident insurance and health insurance product. Total policies in effect as of December 31,2008 was 102M. The beta is 1.4 and last year’s total revenue was about $27B.

CNOOC Ltd (CEO) is China’s largest offshore oil producer. CNOOC said yesterday “revenue for the third quarter fell 23% from a year earlier as lower realized oil prices offset higher output. The company said in a filing to the Hong Kong Stock Exchange Thursday revenue during the quarter totaled 23.8 billion yuan ($3.5 billion). It said output was equal to 647,382 barrels of oil or equivalent, a drop of 18.4% from a year earlier, while average realized prices throughout the quarter was $67.83 per barrel, a drop of 36.6% on year.”

Interactive Map: China’s Oil Empire

China-Oil-Map-Empire

Source: China’s Economic Observer

Click on the map to see China’s big oil companies’ (CNOOC, CNPC, and Sinopec) interests across the globe.

Ten Foreign Stocks by Largest Market Capitalization

I ran the stock screener for foreign stocks traded in the NYSE with the following conditions:

Market Cap = $100B+

Dividend Yield = 3% or more

The search resulted in the following 10 ADRs:

1. Royal Dutch Shell plc ( RDS.A)

2. China Mobile Ltd. (CHL)

3. BP plc (BP)

4. TOTAL S.A. (TOT)

5. Telefonica S.A. (TEF)

6. Banco Santander, S.A. (STD)

7. Vodafone Group Plc (VOD)

8. Novartis AG (NVS)

9. GlaxoSmithKline plc (GSK)

10. Sanofi-Aventis SA (SNY)

Oil giants Royal Dutch Shell plc ( RDS.A), BP plc (BP) and TOTAL S.A. (TOT) have diversified global operations. With the price oil rising near $80, this sector is getting the attention of investors. Yesterday BP reported strong earnings. Total and Shell may follow suit as well.

Telecom providers China Mobile Ltd. (CHL), Telefonica S.A. (TEF) and Vodafone Group Plc (VOD) all have excellent franshises. For example, UK-based Vodafone has established its brand in many emerging markets and continues to increase subscribers.

Spanish bank Banco Santander, S.A. (STD) is the lone bank in the above list. Despite sluggish domestic housing market, Santander is well positioned for growth due its huge presence in overseas markets such as Latin America.

Drug majors Novartis AG (NVS), GlaxoSmithKline plc (GSK) and Sanofi-Aventis SA (SNY) manufacture many preventive vaccines, medicines and consumer health-care products. These drug makers have diversified businesses and their stocks are good picks for all market conditions. Last year all three had revenues exceeding $40B. GlaxoSmithKline plc is especially well known in developing countries. Some of the top brands of GlaxoSmithKline include Ribena, Horlicks, Aquafresh, Panadol and Tums. GSK website states “Every minute…more than 1,100 prescriptions are written for GSK products.”

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