Sovereign Funds Had Bet on QE and IT WORKED


As financial equity markets further roiled during the precipitous fall of Lehman Brothers, institutional investors realized they would be facing a new landscape for the next decade. Central banks quickly pumped money into the global financial system, hoping to stave off a calamity. A number of sovereign funds took advantage and tactically allocated resources into specific markets of listed equities and distressed assets. Some funds like the Abu Dhabi Investment Authority got stung backing U.S. financial institutions like Citigroup or the Korea Investment Corporation’s lackluster investment in Merrill Lynch. By analyzing sovereign wealth fund transactions, allocation percentages and general trends over the past five to seven years, a clear majority of sovereign wealth funds pushed capital toward countries that participated in significant quantitative easing. According to the Sovereign Wealth Fund Transaction Database, from 2008 to 2014, sovereign wealth funds directly invested US$ 102 billion in the United States.

Sovereign funds that allocated to the U.S. when the Federal Reserve intervened by engaging in massive QE measures, performed higher than many SWFs that preferred greater allocation to emerging markets.

The effects of accommodative monetary policy worked very well for wealth funds like Australia’s Future Fund that sat on cash and then allocated big time to developed markets. From early 2009, the S&P 500 index plummeted around 700, eventually the broad stock market average reached new record peaks above 1,900. Performance clearly partially-attributed to the Federal Reserve injecting US$ 85 billion per month into Treasuries and mortgage-backed bonds, pushing down interest rates. These measures increased bond and stock prices in Western developed markets.

Again, funds like the New Zealand Superannuation Fund (NZSF) allocated more toward developed markets, while funds (a number of the Gulf funds) that placed bets in emerging markets had drags in performance. However, even with the gulf-based sovereign investors, allocation percentage-wise was greater in developed markets versus emerging markets.

New Zealand Superannuation Fund – Geographic Allocation

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