A: Yes, and despite all the paranoia, we are quite happy to take money from the SWFs. My point is that there is nothing odd about the SWFs, there are just certain differences in the cultures. The American politicians do not have to accept their money if they don’t trust them, but they do. These funds are just recycling money, that’s the nature of economics. Their managers are not very speculative traders and we cannot expect them to take down the British pound as George Soros did in 1992.

All that the Sovereign funds do is buy into a bit of value when they see an opportunity, and stay there for the long term. If Warren Buffet was managing the SWFs, the rest of the world will think that’s great. I don’t see anything wrong with buying Citibank at junk bond status because it is an opportunity. Probably all the hedge fund managers would love buying ADIA stock now to get that yield, but it will never become public. So, these funds are not run on emotions; they are managed on logic and long-term views.

I think that the problem is that now the SWFs are the only people who have the capital to bail out the investment banks, and suddenly everyone is worried. But who would have bailed them out if it hadn’t been for Tamasek, ADIA, KIA. I wonder if the U.S. would nationalize Merrill Lynch and Citibank, just as the U.K. nationalized Northern Rock. I don’t think it would.

Another myth is that people often associate the SWFs with Saudi Arabia, while Saudi Arabia actually doesn’t have a centralized fund or a designated authority for investing on foreign markets. The goal of Saudi Arabia is primarily to retain that surplus money within the country.
So, the largest oil-related SWFs are Abu Dhabi, with estimated capital of more than a trillion dollars, KIA in Kuwait, with capital of about $250 billion, and the Norwegian Oil Fund, which was established in 1990. The other funds are mainly related to Asia, such as Temasek Holdings and GIC in Singapore and CIC in China.

Q: I believe that Chile and Peru are also heading in the direction of building funds based on the copper and mining proceeds.

A: Yes, there are smaller funds. Kazakhstan has a fund based on oil profits. Iran also has an oil fund, despite all the economic sanctions. Its policy of piling the surplus into a separate account has resulted in a fund of about $13 billion. Libya is also coming out with a $40-billion fund.

With all the focus on the Arab countries, people tend to neglect the developments in North America. On the U.S. doorstep, Canada has an investment fund in excess of $120 billion. It is again based on oil as Canada has the second largest oil reserves after Saudi Arabia. Alaska has an oil fund at about $40 billion, which has nothing to do with the rest of the country. If U.S. politicians could look over their shoulders, they should see that they have it all on the continent but, generally, SWFs keep fairly low profile and avoid publicity.

People also tend to forget the SWFs in Korea, Malaysia, Taiwan, China, and Singapore, who generate surplus through trading activities. At the end of the day, these funds are all about the surplus income. India has done a phenomenal job opening up its economy, and who knows what would happen if it continues to grow at the current pace for few more decades.

Q: Could you give us some examples of specific investments of those funds?

A: KIA in Kuwait is quite happy to be a long-term holder of Daimler Chrysler stock, since it was a Mercedes Benz stock. They are not looking to sell it because they don’t want fireworks in their portfolio. They want the stability that such stocks provide because the goal is to ensure that the capital has a good home and provides good dividend yield and capital appreciation.

In another example, Abu Dhabi owns a phenomenal amount of property in the U.K. and the U.S., and so does Saudi Arabia. It is very hard to put a finger on how much they own, but you can see that those funds love American commercial property.

When the U.S. banks got into trouble because of lending too much money and taking too much risk, they needed the people who had big capital and could fill the gaps in their balance sheets. The only such funds were the sovereign wealth funds. Practically, the West was coming to the Orient and beyond to raise capital. Citibank came to Abu Dhabi and, at the time, it looked like a good deal. Now the deal is being questioned, but if Citibank is really junk bond status, where does that put everyone else on the corporate bond market?

The problem is that people forget the market cycles. In 1997, we had the banking crisis in Asia and in 1998 we had the crisis in Russia, which accumulated a lot of debt. Now, because of the oil prices, Russia has a SWF of about $155 billion and will invest most of it in government agency securities.

Russia has split its Stabilization Fund into a reserve fund of $125 billion and a $32-billion National Wealth Fund. The reserve fund is entirely dedicated to government securities, including Freddie Mac, Fannie Mae, the U.S. Federal Home Loan Banks, and Federal Farm Credit Banks. That means that there is a potential for $125 billion of Russian money buying up securities from the U.S. government agencies, and I think that the American politicians should be happy with that fact.

The remaining $32 billion is intended to be more speculative in nature. Of course, speculative has a different meaning for the Russians, who are very risk averse. They have actually stopped any investment decisions on that fund until they decide the level of risk they are prepared to take.

Overall, no head of SWF wants to be seen as the man who lost the wealth of the nation. That means that all the funds are very keen to insure that, first and foremost, they maintain the capital. Trying to get little extra return comes second. Therefore, none of these funds would leap into the really speculative ends of the market.