Published: September 1, 2009
The financial downturn could lead to some unexpected consequences for sovereign wealth funds, according to a new report.
The latest ‘Vision’ paper from State Street, a financial services firm that has worked with sovereign funds for more than 20 years, highlights the changes that have taken place in the SWF market during the crisis and examines how funds may have to change in the coming months and years.
The paper, ‘Sovereign wealth funds: emerging from the financial crisis’, points to funds’ short-term responses to the crisis as refocusing on liquidity, de-risking their portfolios and shifting their focus on domestic markets. More obvious longer-term consequences for funds, meanwhile, will include revising what constitutes adequate reserve capital and re-evaluating the role of the state in the local economy.
However, State Street’s head of sovereign advisory and report co-author Andrew Rozanov says there could be even more significant, yet less obvious, consequences. For example, he says there may be an increased emphasis on strategic policy objectives for funds – not just on risk versus reward – while there could also be a push for funds to become more closely involved in corporate governance issues within their investee companies during troubled times. Furthermore, SWF holdings may become more deeply integrated with other state assets.
“While the global financial crisis has presented SWFs, like other institutional investors, with serious liquidity and performance challenges, it could also provide and important catalyst for SWFs to re-examine their identity, priorities and objectives in a new financial world order,” Rozanov writes in the report. “These deliberations could have a significant long-term effect on how the funds operate in ever more closely intertwined capital markets around the world.”