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ESTIMATE: Sovereign Wealth Funds Paid Around $14 Billion in Fees

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When it comes to the financial sector, asset management is one of the most profitable industries in the world. The Boston Consulting Group put out a 2014 figure saying there is US$ 74 trillion worth of professionally-managed assets. One of the fastest growing institutional investor classes are sovereign wealth funds which have taken the parochial asset management industry by storm over the past seven years.

37% of sovereign wealth fund assets are managed externally, according to a recent SWFI estimate.

Sovereign Wealth Funds – $2.76 Trillion Managed Externally

Typically, a sovereign wealth fund is perceived as an enigma for traditional U.S. small to mid-sized asset managers. These managers have spent their marketing dollars and time toward investment consultants, endowments and U.S. pensions. This is changing. With sovereign funds expanding assets, smaller asset managers are paying greater attention to this rising institutional investor class, hoping to not lose out against the heavy weights like PIMCO. Meanwhile, the giant investment houses like BlackRock, BNY Mellon Investment Management, State Street Global Advisors and Amundi have allocated considerable resources tending the expanding group of sovereign investors. 37% of sovereign wealth fund assets are managed externally, according to a recent SWFI estimate. Some US$ 2.755 trillion is being managed by external parties out of a total of US$ 7.367 trillion. Collectively, how much are asset managers profiting from sovereign wealth funds? For example, by using the California Public Employee’s Retirement System (CalPERS) as a proxy, in fiscal year 2014, the pension investor spent US$ 1.59 billion on external managers and performance fees. These costs come out to about 50.7 basis points. By using CalPERS’ management costs as a proxy for the sovereign fund industry, one can roughly estimate that US$ 14 billion worth of fees have been paid to external managers in 2014.

Sovereign Fund Management Trends

Given the weighted distribution of assets under management, the top 10 sovereign wealth funds significantly impact the total amount of fees being paid to external managers. Take for example, Norway’s Government Pension Fund Global (GPFG) which manages over 96% of its assets internally. Other wealth funds like Australia’s Future Fund or the Kuwait Investment Authority have tilted the wheel in the opposite direction – showing preference toward external investment managers.

Michael Maduell, President of the Sovereign Wealth Fund Institute

Michael Maduell, President of the Sovereign Wealth Fund Institute

“Superior fund performance does not guarantee you will get noticed by sovereign funds. Investment managers need to actively engage sovereign investors in a variety of channels in order to win business,” warns Michael Maduell, President of the Sovereign Wealth Fund Institute.

As wealth funds like the Future Fund and the Alaska Permanent Fund grow, they will positively impact the fee landscape for fund managers, as they rely heavily on external management. The state of the sovereign wealth fund management industry will favor a variety of asset managers. With the larger more sophisticated funds, alternative asset managers will prosper, thus there is tremendous potential for fee income. Real estate, infrastructure and private equity funds continue to raise capital from sovereign funds. For example, real estate managers like Tristan Capital have attracted wealth funds as limited partners such as the Texas Permanent School Fund for their recent fund, European Property Investors Special Opportunities IV. The voracious appetite to get into top-tier funds has allowed general partners to hold some fees steady.

However, with the advent of smart beta and large institutional investors looking at passive products, equity and fixed income managers may have to adjust to reduced fee income. Fee negotiation among seasoned wealth funds is becoming commonplace, as there are a plethora of asset managers to choose from and the lure of a significant capital commitment.

Note
There are pros and cons of using CalPERS as a proxy for fee calculation for the SWF industry. Some key reasons are that CalPERS uses a similar ratio in a variety of dimensions that include: division of internal and external managers, alternative asset allocation, and the usage of in-house management in relation to fixed income and equities. Using Norway’s SWF as a proxy would distort the fee number, as the majority of its assets are managed in-house.

SWFI First Read, September 19, 2018

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QIA Eyes Investment in Chinese Lender Lufax

The Qatar Investment Authority (QIA) is in talks about a possible investment into Shanghai-based Lufax, one of China’s largest online lenders. The seller of the possible stake is China’s Ping An Insurance (Group) Co. Ltd. Lufax’s official name is Shanghai Lujiazui International Financial Asset Exchange Co. Ltd.

Wealth Funds Back Hotpot Giant

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Japanese Government Capital Provides Initial Life for Texas Bullet Train

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Dallas-based Texas Central Partners, LLC is the developer of a proposed high-speed rail system, dubbed the Texas Bullet Train, between Dallas and Houston. Project costs are estimated between US$ 12 billion to US$ 15 billion. The developer secured US$ 300 million in project loans from Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development (JOIN) and the Japan Bank for International Cooperation (JBIC). [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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DOJ Investing Tesla Over Musk Comments

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The U.S. Department of Justice (DOJ) is conducting a fraud investigation over Tesla as its CEO Elon Musk made public statements on twitter. This is a criminal probe. In addition, earlier, SWFI reported the U.S. Securities and Exchange Commission (SEC) is conducting a civil inquiry into Elon Musk regarding his statements.

This all surrounds Musk tweeting in August that he was thinking of taking Tesla private and had “funding secured” for the transaction. Both government authorities are seeing if Musk misled investors and violated federal securities laws with his public statements.

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