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Oil and Trade Gains Make Major Investors Of Developing Nations
The managers of these funds appear receptive to making the funds more transparent and following a code of best investment practices, which is being developed by the International Monetary Fund, Lowery said. The topic was a focus of a first-of-its-kind dinner at the Treasury Department this month, at which Secretary Henry M. Paulson Jr. led a wide-ranging discussion with top sovereign-wealth-fund managers from around the world.
"These funds, like many other investors, are shifting from low-risk assets to higher-risk assets to increase their expected returns," said Martin Skancke, director general of the asset management department of Norway's Finance Ministry, which runs a $350 billion fund and was represented at the dinner. The problem, he added, is that "there's a lack of transparency in many funds."
About two dozen countries have established sovereign wealth funds, including Iran, the United Arab Emirates, Singapore, Kuwait, Australia and Russia. While precise data about each of the funds can be difficult to obtain, most Wall Street analysts agree that the value of the funds has reached about $2 trillion and is likely to grow at least fivefold by 2012.
"We want to be encouraging people to invest as much of this money in the U.S. as we can," said Douglas Rediker, a former investment banker who works at the New America Foundation in the District. "We are driving our way around the country every day and sending them our U.S. dollars at $3 or $4 a gallon. . . . You really want those dollars recycled back into your economy, because if they aren't, it means they are going somewhere else and the dollar is less attractive and will continue to weaken."
Many of the oil-rich countries, including Norway, Kuwait, the United Arab Emirates and even Canada, are using sovereign funds to build up investment portfolios that will support their populations in case their output from oil pools starts to decline. The Kuwait Investment Authority, a longtime investor in Chrysler, and the Abu Dhabi Investment Authority are respected for their acumen and, quite simply, for their size, according to those familiar with their activities. Norway's fund, meanwhile, is looked to as a model of transparency and governance, and its managers have been actively advising several nations, including East Timor, Bolivia, Nigeria and Russia, which are starting funds.
China's source of money is its trade surplus with the United States and other countries. In the past, China poured much of its surplus, estimated at $1.3 trillion, into U.S. Treasury issues. But now, it is seeking higher returns. On. Sept. 29, it took $200 billion from that surplus and launched a sovereign wealth fund.
Others funds are just getting off the ground and are hiring U.S. finance managers to learn how to run funds as productively as such high-return portfolios as the Yale Endowment and the $246 billion pension fund Calpers.
They are quickly becoming savvy about how to invest in the West.
"We advise them to be very careful in how they do direct investments that are politically sensitive," said Monte M. Brem, chief executive of StepStone Group, which advises sovereign-wealth-fund managers. "If you are going to do a transaction that will be in the realm of political sensitivity, make sure you do lobbying work."
With nationalistic concerns rising around the globe, many sovereign funds are giving their money to U.S. managers and letting them decide where to put it. Last month, Abu Dhabi, part of the United Arab Emirates, invested $1.35 billion in the D.C. private-equity giant Carlyle Group, a 7.5 percent ownership stake. But it agreed to forgo any management role. Likewise, China's fund bought a 9.9 percent stake in Blackstone Group but renounced any voting rights to avoid triggering a U.S. government response.
In the coming years, as these funds become more sophisticated and as the governments they represent develop more mature financial systems, they will become major competitors to the U.S. hegemony in finance.
"You can see already in 10 to 20 years these funds are going to lead to a sophisticated asset-management system in Asia and the Middle East," said Patelis, of Merrill Lynch. "We already have huge interest among our clients to link up with these funds. Everybody wants us to introduce them."