The Sovereign Wealth Fund Lending Game

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On December 8th, Morgan Stanley tactically announced plans to eliminate 1,200 jobs. 470 of those jobs belonged to bond and commodity traders and salespeople. More bad news. In the third quarter, Morgan Stanley posted a 42% fall in fixed income trading revenue. The investment bank is taking a US$ 150 million charge in its fourth quarter. Morgan Stanley, Credit Suisse and other banks are changing their stripes, shedding banking in favor for wealth management, especially in Asia. Besides prolonged low interest rates and stricter banking regulations, part of this business trend can be blamed by more asset owners becoming their own banks. The era where large investment banks control and command fixed income markets is slowly fading, as colossal pensions and sovereign investors can ramp up internal capabilities and generate yield from their massive balance sheets. Today, the sovereign wealth fund market is over US$ 7 trillion in assets.

By getting into the nitty-gritty lending game, whether its real estate debt, structured credit or high-yield loans, wealth funds are able to enhance return in their fixed income allocations.

On the other side of the world, sovereign funds are exploring simplified, inexpensive channels of generating yield in their portfolios. By getting into the nitty-gritty lending game, whether its real estate debt, structured credit or high-yield loans, wealth funds are able to enhance return in their fixed income allocations. For example, countries like Denmark face years of negative interest rates; rates being held down below zero since the middle of 2012. Is the Bank of Canada next to partake in negative interest rate chatter? Norway’s massive sovereign fund is requesting permission from its government to expand its universe of investments – hoping to add a 5% allocation in infrastructure and doubling real estate exposure to reach 10% of assets. In their letter to the Norwegian Finance Ministry, the fund also hinted the possibility of allocating to renewable energy infrastructure, a lure for many environmental-minded policymakers. Yngve Slyngstad, CEO of Norges Bank Investment Management (NBIM), publicly stated to the media that negative interest rates in some countries are posing hurdles for the fund’s investment strategy. Norway’s wealth fund is stuck; it has been reducing bonds over the past five years, while growing allocation to listed equities and fixed income.

The Amazing GIC

Sovereign funds have been able to generate alpha in yield strategies. Unconstrained Asian SWFs like GIC Private Limited can be seen as a source of lending capital to many parties. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]



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