From All Sides, Sovereign Funds Hold Tight

Posted on 09/01/2015


Markets jittered last week, but it did not stop sovereign funds from embracing markets in various asset classes. Wealth funds like the New Mexico State Investment Council have committed capital to real estate funds in these markets. Meanwhile, Australia’s Future Fund has boosted its cash reserves from 11.2% of assets from June 2014 to 19.5% of assets June 2015 (A$ 22.89 billion on the table.) On September 1, 2015, the New York Stock Exchange invoked Rule 48, a means to smooth the opening of the market due to potential volatile circumstances. This particular rule permits NYSE’s chosen market makers (human traders) to abstain from disseminating price indications ahead of the opening bell. To make matters more pessimistic, the infamous “death cross” pattern has been appearing in major market indices. The cross is a signal used by technical traders. The pattern typically occurs when the 50-day moving average price crosses below the 200-day moving average price trend. This can indicate that a current short-term plummet is moving into a longer-term downward movement. For example, in September 22, 2014, the Russell 2000 index experienced a “deaths cross,” after the next three weeks, the index fell another 7.1%.

This is great news for the average sovereign wealth fund, not for the short-term, but for the long-term investor. Many sovereign funds have a contrarian tilt and have taken opportunities like market corrections to load up on equities, waiting for index prices rebound. Some of Norway’s Government Pension Fund Global (GPRF) best returns were post-crisis. However, not all asset managers want to go through this process. Increasingly, in August, SWFI has witnessed a high number of asset management executives planning to leave. For instance, BlackRock’s Quintin Price, the man in charge of the firm’s US$ 944 billion alpha strategies group, a massive division that includes its fundamental actively managed fixed income and equity fund, is retiring next year. Price plans to go back to London and serve as a senior adviser to help transition responsibilities. Price is 54-years-old and was hired back in 2005. He was instrumental in reorganizing BlackRock’s fundamental active equity business. Since the 2012 creation of the alpha strategies group, BlackRock replaced 5 of its 9 U.S equity teams.

Behind the Scenes

Overall, sovereign wealth funds have held tight, not stopping investments in large illiquid assets or taking companies private. However, from a liquidity standpoint, wealth funds that act as stabilization funds are most at risk in these types of scenarios. As oil-based economies suffer expanding fiscal deficits, the need for liquidity becomes more apparent. China has a ton of Treasuries, giving it leverage over the United States. In order to stabilize the yuan, China has been selling Treasuries globally from Belgium to other locations. Foreign exchange reserves have fallen more than US$ 315 billion down to US$ 3.7 trillion. If this pace were to continue, it could have an impact on U.S. interest rates, thus greatly affecting the U.S. equity markets. However, China knows that if it dumped Treasuries at a measured pace, it would devastate the very market it sells its goods to.

Keywords: Norway Government Pension Fund Global.