So a Gulf sovereign fund still has 60% of its assets in dollars? And SAFE is a SWF …

July 29, 2008

My initial reaction to Henny Sender’s front page FT article was probably the opposite of most. I wasn’t all that surprised that sovereign funds are reducing their dollar exposure — though cutting their dollar exposure when the dollar is under pressure does suggest that they, unlike central banks, haven’t been a stabilizing force in the foreign exchange market. I was, though, surprised that “one big sovereign fund in the Gulf” had 80% of its assets in dollars a year ago, and still has 60% in dollars now. 60% is substantially higher than I would have expected. It also is a bit higher than the IMF assumed in its modeling of sovereign funds: their well-established diversified fund was assumed to have 38% of its portfolio in dollars (see the appendix of the IMF’s recent SWF paper)

Moreover, if a major Gulf fund is 60% in dollars and the Gulf’s central banks have an even higher share of their assets in dollars (the UAE’s central bank recently indicated that 95% of its assets are in dollars), the Gulf as a whole has even more dollar exposure than Rachel Ziemba and I thought.

Sender’s article is full of interesting tidbits.

The obvious question to ask is which big sovereign fund in the Gulf had 80% of its assets in dollars until recently. I would assume that major excludes Oman and Bahrain — and I would also assume that the reference to “sovereign wealth fund” excludes the Saudi Monetary Agency. If Saudis, who are widely thought to keep most of their foreign assets in dollars — had cut from 80% to 60% that would truly be news. That leaves the funds of Abu Dhabi, Kuwait and Qatar. The Qataris seem to have a lot of exposure to the UK — and a wildly diversified real estate portfolio — so they don’t seem like the most probable candidate. Plus, they have previously indicated that about 40% of their portfolio is in dollars. ADIA’s reported portfolio* is also geographically diversified, and its holdings are pegged “to global economic growth.” It is hard to see how a portfolio linked to expected growth could be so over-weight the dollar, though Sender reports that currency risk is all managed by a central trading desk. Consequently, some of the currency exposure implied by ADIA’s diverse equity exposure could have been hedged. But it is hard to see how ADIA could be anywhere close to its current rumored size if it had that much dollar exposure and thus missed out on currency gains from holding euros and the financial gains from holding non-American equities over the past few years.

That leaves Kuwait — which hasn’t disclosed much about its portfolio. It was also fairly conservative until recently. But even there the fit isn’t perfect — Kuwait has hinted in the past that its large stakes in BP and Daimler imply that its equity portfolio at least is geographically balanced.

* The data in Business Week indicating that North America accounts for between 40 to 50% of ADIA’s portfolio explicitly excludes ADIA’s investment in private equity, hedge funds, real estate, infrastructure and cash. It consequently could understate ADIA’s dollar exposure. And ADIA could have hedged out the currency risk on its European and Asian portfolio.

(more…)

Posted in RSS