Global sovereign funds 'insourcing' more - Cerulli

Most funds are turning to passive investment strategies after incurring heavy losses
Global sovereign funds 'insourcing' more - Cerulli
IN-HOUSE TECHNIQUES: Sovereign funds are developing in house portfolio management techniques after the global crisis. (Getty Images)
By Dinesh Nair & Frederik Richter
Mon 04 Oct 2010 01:22 AM

Sovereign funds are developing in house portfolio management techniques after the global crisis, a worrying trend for asset management companies, an executive at research firm Cerulli Associates said.

Global asset managers, who have historically pocketed attractive fees by managing a significant share of the sovereign funds, need to be aware of this development while approaching them for funds, according to Shiv Taneja, managing director at Boston based Cerulli.

In an interview with Reuters, Taneja said: "The world's most sophisticated funds are in-sourcing rather than outsourcing. Now that's not very good news for asset management firms."

Sovereign wealth funds, which manage an estimated $3 trillion of national assets for future generations, are slowly emerging after being hit hard by the global credit crisis.

Taneja also said he expected the geographic concentration among sovereign wealth funds globally to slowly diversify as governments in Latin America and Eastern Europe also seek to establish their own funds.

He said: "Right now the concentration of sovereign wealth funds is mainly in the Middle East and Asia Pacific. I expect to see greater diversification in terms of the location of these."

Taneja said most asset managers underestimate how different sovereign wealth funds are in their asset allocations and approaches to investment risk.

He added: "A lot of people when they say, we cover SWFs, it means they have spoken to two of the funds and then they paint the whole industry in that picture."

The only single factor global funds have in common is that all of them tend to have very long investment horizons, he said.

Three of the largest sovereign funds account for over $1 trillion of the total assets under management in the industry.

Taneja cited China's wealth fund, Abu Dhabi Investment Authority and Norway's wealth fund among sovereign funds holding assets in excess of $300 billion each.

Most funds were also turning to passive investment strategies like investing in index replication funds and exchange traded instruments after incurring heavy losses during the crisis from active investment methods.

He said: "I think the mood at the moment has changed. Lets face it, sovereign funds, particularly the ones in Meast and Asia Pacific, burned their hands during the crisis." (Reuters)

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