While some sovereign wealth funds (SWFs) in the Gulf region can trace their origins back to the 1950s and 1960s as decolonisation gathered pace, fresh impetus was provided a decade ago when state coffers across the region swelled following a surge in average oil prices from $20 to over $100.

Though the 14 SWFs now operating in the Gulf may have a shared propensity for opacity, their investment objectives vary significantly – the conservatism of the Saudi Arabian Monetary Agency (SAMA), heavily invested in low yielding US T-Bills and other paper, contrasting sharply with the Abu Dhabi Investment Authority (ADIA), which champions portfolio diversification when it comes to allocation and asset type.

Fahad al-Mubarak, Governor of SAMA, who was appointed in December 2011, comes from the private sector, having previously been the chairman and managing director of Morgan Stanley Saudi Arabia. University of Houston trained, he was also chairman of the Saudi stock exchange, playing a major role in the privatisation of Saudi Telecom.

In its 2012 Invesco Middle East Asset Management Study, investment manager Invesco identifies four broad investment strategies adopted by Gulf SWFs. Development agencies, for example, often take a medium to high investment risk stance and are willing to accept low (negative) target returns in order to meet policy objectives.

Deciphering risk levels
Policy supporters adopt a high investment risk profile and are similarly willing to accept low (negative) target returns in order to meet policy objectives. Meanwhile, diversification vehicles use a ‘balanced’ approach with target returns of six to eight percent over a rolling five to 10 year period, while asset managers will have a ‘high risk’ appetite with target returns larger than eight percent, though often in double digits.

Invesco argues that diversification vehicles generally invest internationally through asset manager products (funds or ETFs). Policy supporters and asset managers similarly prefer international investments but frequently invest outside of asset manager products. Development agencies, on the other hand, focus almost exclusively on local direct investments.

ADIAs stated investment objective, for example, is to look beyond individual economic cycles and focus on strategies aimed at capturing long-term trends – this approach identifies an acceptable level of risk, and then building outwards by adding a diversified range of asset classes that allow it to maximise returns within these parameters.

Fresh impetus was provided a decade ago when state coffers across the region swelled following a surge in average oil prices from $20 to over $100

In addition it also has an internal strategy, which suggests any necessary changes to either new or existing asset classes and their respective weightings may include occasional ‘off-benchmark’ opportunistic investments. Developed Emerging Markets and Small Cap Equities comprise the largest allocation within ADIAs portfolio –allocations fluctuating within the ranges of 32 to 42 percent; 10 to 20 percent and one to five percent respectively; with bonds making up 10 to 20 percent. Geographical allocations range from 35 to 50 percent (North America); 20 to 35 percent (Europe), 15 to 25 percent (Emerging Markets) and 10 to 20 percent (Developed Asia).

The latest performance data from 2011 shows 20 and 30 year annualised returns at 6.9 percent and 8.1 percent respectively. ADIA however, has indicated a change of emphasis – Sheikh Hamed Bin Zayed al-Nahayan, ADIA’s managing director and a member of the ruling family stated:

“Economic leadership is passing to emerging markets, not just as their weight in the global economy passes 50 percent, but as their share of likely future global growth moves far higher.”

Sheikh Hamed, who has a degree in Economics from Emirates University and a Masters in Petroleum Political Economics from the University of Wales, also serves as Chairman of Al Etihad Airways. Meanwhile, December 2013 figures from the Sovereign Wealth Fund Institute show Saudi Arabia’s SAMA Foreign Holdings to be the second largest SWF globally – its assets of $675.9bn only eclipsed by the $818bn under the control of Norway’s Government Pension Fund Global.

Key players to the pitch
Other significant companies in the Gulf include ADIA at $627bn, the Kuwait Investment Authority (KIA) at $386bn and the Qatar Investment Authority (QIA) at $170bn. The smaller operators comprise of Dubai’s Investment Corporation of Dubai at $70bn, Abu Dhabi’s International Petroleum Investment Company at $65.3bn and Mubadala Development Company at $55.5bn.

According to KPMG in its May 2013 report Emerging Trends in the Sovereign Wealth Fund Landscape, global SWFs currently have approximately $5.3trn in assets under management (AUM). Of this, the GCC SWFs account for approximately 30 percent of global SWFs by AUM.

A similarly high profile to ADIA change has been the KIA, although it remains opaque when it comes to reporting investment returns, as the fund has being bound by clauses five, eight and nine under Kuwait’s law No 47 (1982). This mandates it to provide detailed reports to the Council of Ministers; but forbids it to disclose any performance related information to the general public.

The oldest SWF in the world, established back in the 1950s, had stated its investment objectives were to achieve a rate of return on investment that, on a three-year rolling average, exceeds composite benchmarks. This should theoretically be achieved by designing and maintaining an uncorrelated asset allocation consistent with KIAs return and risk objectives; selecting investments and investment managers likely to outperform the respective index for each asset class, and finally; making tactical changes to certain asset allocations so as to benefit from emerging economic and market trends without adversely altering the overall portfolio.

In common with many other SWFs in the region it invests across local and international asset classes as part of a wider brief to diversify the economy away from oil. Apart from utilising external fund managers (EFMs) to manage various mandates (especially for equities, bonds and cash asset classes) it also manages a portion of its assets directly through the Kuwait Investment Office in London (KIO).

Its London connection is important in more ways than one. Marking the recent 60th anniversary of the establishment of the KIO, Bader Mohammed al-Saad, the Kuwait University trained former head of The Kuwait Financial Centre and now Managing Director of the KIA noted the KIA, through the KIO, now manages more than $120bn globally compared with only $27bn 10 years ago.

The KIA has invested more than $24bn in the UK across all asset classes

“The KIA has invested more than $24bn in the UK across all asset classes, sectors and industries. This was $9bn 10 years ago,” al-Saad said.

“In the world of trade and industry, the close co-operation between the KIA and the UK is a force for good which I believe will continue and grow in the years to come.” The KIA also invests directly in private equity funds and hedge funds, and in certain instances will take significant direct stakes in companies for use as core holdings.

Broadening the standard horizons
Recent stakes taken and exited from include BP, Daimler AG, Merrill Lynch and Citibank, among others. 10 percent of all oil revenues are transferred into the Reserve for Future Generations, which it manages on an annual basis. Yet, as witnessed during the global economic meltdown in 2008 the KIA has periodically taken on non-investment roles – in its case propping up local capital markets to the tune of $5bn when the Kuwait Stock market crashed by more than 30 percent.

It also shored up Gulf Bank’s capital base in 2009 with an injection of $420m and still retains a 24 percent stake in Warba Bank, the Islamic lender set up by the Kuwaiti government in 2010 to help stabilise the nation’s banking sector. As part of its stock market flotation, in September 2013 a majority of the shares in the lender, set up with capital of $350m, were gifted to Kuwaiti nationals as part of the state’s wealth sharing programme – each citizen receiving 684 shares.

At the same time the KIA was supporting domestic capital markets, Dubai World (DW), owned by Investment Corporation of Dubai and the emirate’s SWF, issued a thinly veiled threat in a BBC interview to those criticising its failure to provide full financial disclosure – then DW chairman, Sultan Ahmed bin Sulayem, threatening to take his business elsewhere if EU attempts to regulate his activities and those of other SWFs were realised.

Despite the Emiratis seemingly kissing and making up with European politicians the issue of opacity remains a very real one in 2014

His argument was a simple enough one: it would be dangerous for Europe, given that money and liquidity was so badly needed, to discourage investment that could easily be taken elsewhere. Charlie McCreevy, the EUs internal market commissioner, and EU monetary affairs commissioner Joaquin Almunia, had previously argued that SWFs did not make sufficient disclosure of key financial information and backed calls for a code of conduct for SWFs.

In the event DW did not carry out its threat and through its DP World unit it has since worked closely with the UK government, for example, on the implementation of London Gateway, the high profile $2.4bn port and warehouse hub now being constructed to the east of London.

The most senior non-Arab on the board of directors of DW is George Washington University-trained Dr Soon Young Chang. He serves as Senior Advisor in the Investment Corporation of Dubai, providing advice to that investment arm of the Dubai government. ICDs portfolio includes investments in Emirates airline, DNATA, Dubai Aerospace Enterprise and a number of UAE-based banks and financial firms such as Emirates NBD and Noor Islamic Bank.

Despite the Emiratis seemingly kissing and making up with European politicians the issue of opacity remains a very real one in 2014. Observers of Gulf SWFs still rely on corporate filings for a significant amount of their information. Which of course works fine when stakes taken by SWFs exceed specific thresholds and have to be publicly reported anyway. To gauge SWF transparency (or lack thereof) the Linaburg-Maduell Transparency Index was developed at the Sovereign Wealth Fund Institute by Carl Linaburg and Michael Maduell back in 2008.

The index is based on 10 parameters depicting sovereign wealth fund transparency to the public – factors including reason for creation, origins of wealth, government ownership structure; up-to-date independently audited annual reports; ownership percentage of company holdings, geographic locations of holdings, total portfolio market value, investment returns, and management compensation among others.

The minimum rating a fund can receive is one, although for a SWF to be deemed sufficiently transparent the Sovereign Wealth Fund Institute recommends a minimum value of eight. Linaburg-Maduell is now accepted as the global standard benchmark. In Q3 2013 the UAEs Mubadala was the Gulf’s highest rated SWF with a value of 10. Close behind was the UAE’s International Petroleum Investment Company at nine; followed by Bahrain at eight; Kuwait KIA at six; UAE (ADIA) at five; Qatar (QIA) also at five; Saudi Arabia (SAMA); Saudi Arabia (Public Investment Fund); UAE (Investment Corporation of Dubai); Oman (Oman Investment Fund); Oman (State General Reserve Fund) all at four, and UAE (Emirates Investment Authority) at three.

A highflying portfolio
Despite signing the Santiago Principles, which detail governance and transparency guidelines for SWFs, full disclosure insofar as the QIA is concerned remains illusory. What it will publicly confirm though is a stated investment aim of taking strategic stakes in western and Asian companies as part of a wider strategy to gain exposure to major economies and furthering the Qatar ‘brand’.

Major names featuring in the QIAs estimated $100bn and over portfolio include (and have included) Porsche, Tiffany, Credit Suisse, Bank of China, Sainsbury’s, LMVH, and Barclays, among others. As Aladdin Hangari, head of Credit Suisse’s Qatar operations – one of the top advisers to the fund – puts it: “They tend to do more in Europe and the US because they’re more familiar with the legal framework, which makes it easier to do things.” But as he notes: “I think going forward; we’ll see them doing more in emerging markets as long as they find the right opportunities.”

For the QIA the Barclays stake has proven especially controversial – Barclays being accused by UK regulators back in September 2013 of improper conduct in its dealings with Qatar and threatening to impose a $79m fine. This stemmed from a long-running investigation of agreements the bank made with Qatari entities that were major investors in a pair of 2008 share sales by the bank.

Cynics charged at the time that the share sales amounted to nothing more than a device for the bank to avoid a bailout from the UK government and, by extension, UK government control. UK regulators have alleged the bank acted recklessly by failing to disclose to investors the full extent of two agreements it made with Qatar in 2008, adding that the main purpose of two advisory services agreements made between the bank and Qatar Holding (in June and October 2008) – the global investment house founded by the QIA in 2006 – was not to obtain advisory services but to make additional payments, which would not be disclosed, for the Qatari participation in the capital raisings at the time.

Another example of not everything going to script was the planned flotation of Doha Global Investment, a $12bn Qatari investment firm backed by assets from Qatar Holding, which was postponed in May 2013, pending necessary regulatory approvals. Qatar had unveiled plans in February to create the investment company with Qatar Holding transferring $3bn worth of assets into the new firm – a similar amount due to be raised via an IPO on the Qatar Exchange, aimed at Qatari citizens, companies and institutions.

What is noteworthy about Doha Global Investment – apart from reconfirming Qatar’s aggressive acquisition of foreign assets – is that it will be independent, in terms of investment selection, of Qatar Holding – even if Qatar Holding makes investment suggestions. What it will do is serve as a conduit for the local private sector to participate in investment opportunities across the world, similar to Qatar Holding. The fund is being created as economic growth picks up after much of Europe fell into a recession last year and the Chinese economy advanced at its slowest pace since 1999.

In the meantime, the investment focus is generally beginning to shift, given capital expenditure on infrastructure projects in the GCC is set to total $142bn over the next seven years – the majority of which will relate to road and rail. In addition to this are planned mega projects such as the $86bn King Abdullah Economic City in KSA, Qatar’s $70bn 2022 FIFA World cup related infrastructure and the UAE’s $20bn Masdar City development.

Given this backdrop it should come as no surprise that the Gulf SWFs, which have traditionally been involved in infrastructure and real estate investment in any event, are likely to further raise their profiles in the region as governments accelerate local development objectives to facilitate greater economic growth as they diversify away from predominantly energy-based economies. This will mean further expenditure not only with infrastructure but also in the education and healthcare sectors.

As KPMG points out, “While distressed periods are typically times when oil-rich SWFs have taken advantage of opportunities to acquire trophy assets in the west, we expect there to remain a heightened sense of caution. Western governments and organisations looking for capital from the Middle East need to adapt and demonstrate a deep understanding of what is driving the thinking of SWFs in the region, and be dedicated to making a long term commitment to building relationships that add value to their investment policy.”

Invesco’s own data would appear to confirm this – its asset management study noting that investment allocation by GCC SWFs went from a split of 33 percent to 19 percent in continental Europe and 29 percent in North America back in 2011 to 56 percent, to four percent and 14 percent in 2012. Whether this changing stance will translate into a boost for investment performance returns in many ways is a moot point – the more immediate objective being to pacify young and increasingly demanding local populations.