Newsletters

Launched at the WEF Jordan Summit, report sheds new light on the performance of Middle Eastern SWFs during the financial crisis, revealing a diversity of strategies and results.

DEAD SEA, Jordan, May 15: Today at the World Economic Forum on the Middle East, Monitor Group, one of the world´s leading advisory and consulting firms and Media Tenor, the Zurich-based international media research institute, releases Testing Time, a report providing an in-depth picture of 13 Middle Eastern sovereign wealth funds and the impact of the global financial crisis on them. The report documents how the funds have responded to the crisis and how their public perception was affected by these challenges. It considers lessons learned so far about effective fund strategy, organization, and management. Key findings of the report are based on the Monitor-FEEM SWF Transaction Database, the most extensive database of publicly-recorded SWF investment activity available, containing 1,158 deals completed by 17 funds in 11 countries between January 1, 1981 — December 31, 2008, and updated on a quarterly basis. The Monitor report challenges common assumptions about the behavior, strategies and performance of Middle Eastern sovereign wealth funds, highlighting their performance based on actual data.

The report also highlights results from Media Tenor, showing that SWFs have recently started to understand the importance of ongoing news flow in regards to building global trust. The Abu Dhabi Investment Authority, for example, hired a Head of Corporate Communications and Public Relations in 2008 and has done well in promoting a favorable media image. Other funds, including Mubadala in Abu Dhabi and Mumtalakat in Bahrain, are participating in a trend towards greater transparency and accountability in governance. This opening up will have to be accompanied by a greater awareness of the importance of how they are perceived from the outside.

“The variation between the performances of Middle Eastern sovereign wealth funds is more diverse than expected”, says Mark Fuller, CEO Monitor Group at a media briefing during the World Economic Forum Middle East Summit at Dead Sea, Jordan. “The relative youth of the majority of these funds means that the financial crisis has been their first taste of economic adversity, and some of the funds have sometimes not coped well. On the other hand, the larger and more experienced SWFs, have not fared too badly. This suggests an important variation in how funds assess risk and uncertainty and those larger, more experienced funds have better risk management systems and organizational architecture to deal with unforeseen circumstances. It will be important for younger Middle Eastern sovereign wealth funds to learn from the financial crisis. This may mean changes to their processes or organization.”

The key findings of the report are:
• As a group, the MENA SWFs suffered during the crisis, losing on average between 20 and 25 percent of the value of their known equity portfolios. Even so, they performed significantly better than SWFs based in the Asia-Pacific region as well as certain high-profile funds and endowments in North America and Europe.
• Their performance disguises significant variation in individual fund performance. Older funds with large and diversified portfolios were somewhat protected from critical damage, while those that had pursued aggressive investment strategies and participated in significant leveraged transactions fared much worse.
• The funds maintained a strong pace of new investments during 2008, although this slowed dramatically during the first quarter of 2009. Starting in the second half of 2008, most new investments were relatively small, domestic or in-region, and made less in expectation of near-term financial return than to help faltering enterprises or to develop and diversify local economies.
• Among foreign markets, emerging economies in the MENA region and Asia are attracted most new SWF foreign investment. Europe received more investment than North America, with the United Kingdom the most likely destination. Investment in North America all but dried up.
• The crisis exposed problems in how the funds manage risk and uncertainty. Many had never experienced a downturn and seemed ill-prepared to recognize signals of impending trouble or take effective action. This suggests a need to review or put in place improved sensing mechanisms, probabilistic assessment of potential outcomes, and actionable plans to limit damage and facilitate adaptation to changing circumstances.
• To manage more effectively in uncertain times, funds may wish to re-examine their organization structures, human asset policies, information and intelligence systems, and approaches to managing risk and uncertainty.
• Pressure to improve governance and accountability is rising. Sovereign government owners are seeking more accountability and appear to be pushing for shifts in portfolio composition by asset class, geography, and sector. Increasing external demands have encouraged more disclosure and peer oversight to take advantage of more favorable public opinion.
• Finally, the crisis has several implications for investment strategy. First, increased domestic investment makes sense only in sectors and clusters in which advantage can be achieved and sustained in global competition. Second, the funds may wish to move beyond passive investing to add value beyond providing capital, helping to build the companies in which they invest. Last, the funds would be shortsighted to abandon investment in OECD countries. The present environment offers abundant opportunities for patient investors with cash on hand to realize significant long-term gains.

"Testing Time" is the latest in a series of reports and quarterly updates documenting and assessing sovereign wealth fund activity, which commenced last year with the report, Assessing the Risks. The next in the series, to be released next week, will be "Weathering the Storm: Sovereign Wealth Funds in the Global Economic Crisis of 2008", which was written in partnership with the Fondazione Eni Enrico Mattei (FEEM) in Milan, Italy. All the sovereign wealth fund reports are available to download from www.monitor.com.

About Monitor Group:
Monitor Group works with the world´s leading corporations, governments and social sector organizations to drive growth on the issues that are most important to them. Founded and based in Cambridge, Massachusetts, the firm offers a range of services - advisory, capability-building and capital services – designed to unlock the challenges of achieving sustained growth. Monitor brings leading-edge ideas, approaches, and methods to bear on clients´ toughest problems and biggest opportunities.
For more information visit www.monitor.com or contact Victoria Barbary (Victoria_Barbary@monitor.com) or Edward Chin (Edward_Chin@monitor.com).

<< back <<

Please login to get more in pdf