Sovereign Funds Go Local

Political pressure is on sovereign wealth funds to use investment to support local communities and infrastructure.

The retreat from globalization and the support for local manufacturing in the US and other economies is putting pressure on several sovereign wealth funds (SWFs) to change their investment strategies to impact their local communities directly and support infrastructure as well.

The lion’s share of sovereign funds historically have had global mandates and did not invest domestically. “Any change in regulations that discourage the free flow of capital and investment could have a serious impact on the ability of most SWFs to achieve their mission,” notes Scott Kalb, chairman of the Sovereign Investor Institute, a group organized by Institutional Investor.

New funds are being created and designed to address growing infrastructure and development needs. Seeking to boost growth and employment, several governments have recently established sovereign funds to finance infrastructure projects. Turkey, for example, transferred its state-owned holdings in several companies, including phone operator Turk Telekomunikasyon and national bank T.C. Ziraat Bankasi, to its newly established fund in order to sell those assets to finance president Recep Erdogan’s national projects.

Frontier markets are following the trend. In February, the government of Bangladesh—with high GDP growth of 7.11% in fiscal year 2015–2016—approved a new sovereign fund to finance large infrastructure projects and pay for outstanding loans and other emergency needs. The initial capital, funded by the nation’s foreign exchange reserves, will be $2 billion and the authorized capital will be $10 billion, with funds to be raised annually through the issuance of sovereign bonds.

Other existing large sovereign funds have reacted to the global political and economic uncertainty by increasing their investments in assets that generate stable returns, such as real estate and infrastructure, and in emerging technologies to foster local innovation. China Investment Corporation, China’s largest sovereign fund, confirmed in its last report its plan to increase infrastructure investments. CIC Capital recently invested in Tank & Rast, Germany’s largest owner of motorway service stations.

“While sovereign funds like the fact that infrastructure investing is uncorrelated with other asset classes and provides a steady income,” Kalb notes, they may confront policy and regulatory risks. In addition, funds investing abroad are worried that populist politics may lead to antiforeign sentiment that blocks access to global markets.