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Sovereign Funds Still see Value in Banks: State Street

Date: Thursday, August 28, 2008
Author: Kevin Plumberg, Reuters.com

 HONG KONG (Reuters)—Sovereign wealth funds will likely plough more money into capital-starved financial firms if they see long-term value, said a regional executive on Wednesday [Aug. 27] at one of the world's biggest institutional money managers.

Hon Cheung, regional director of the Official Institutions Group in Asia at State Street Global Advisors, also expects the funds increasingly to adopt passive investment approaches, given the need to move large amounts of money without disrupting markets.

State-backed investors like Singapore's Temasek and the China Investment Corp. have seen the value of their stakes in Western financial institutions eroded in the last year as a crisis of trust among lending firms continues to ravage balance sheets and cause instability in the sector.

Still, he said he believes sovereign funds will probably continue to make highly selective investments in the sector—and in so doing provide a lifeline to struggling investment banks. "Their purpose is not to support the U.S. taxpayer or the U.S. economy or to ensure stable global markets. If by doing that, they get a side benefit that's great. But their principal job is to benefit the stakeholders," said Mr. Cheung, referring to bank investments.

Sovereign funds control roughly $3 trillion worth of assets, and half of the 10 largest funds are in the Asia-Pacific region, according to a State Street report. SSgA manages about $250 billion in assets for official institutions.

Between 2007 and April 2008, sovereign funds invested $80 billion in the banking industry, mostly in U.S. and European lenders that had been rocked by losses on debt related to subprime mortgages, according to State Street data. Most such investments are underwater, and most sovereign funds have become gun-shy about the financial sector.

The chief executive of South Korea's sovereign fund said recently it may shy away from investment in U.S. banks such as Lehman Brothers after the fund took $800 million in valuation losses on an investment in Merrill Lynch.

Temasek, however, said on Tuesday [Aug. 26] it continues to find opportunities in the financial sector even though executives at the fund expect more fallout from the credit crisis. Financial sector holdings make up 40% of its $130 billion portfolio.

"Looking at the broad evidence there has been appetite. Whether that appetite can continue with further deterioration, that's very difficult to say, but right now you have seen news there are people still interested to participate in these transactions," said Mr. Cheung, who heads the firm's relationships with central banks and other sovereign agencies in Asia.

Mr. Cheung said in an interview in Hong Kong the sheer collective size of sovereign funds makes it increasingly difficult for them to be active investors and to make big, concentrated investments. "When you reach a size like $3 trillion and you start to grow, I think the ability to pick up the opportunistic transactions and think on a strategic basis becomes challenging."

He said he expects more sovereign funds to adopt passive investment styles, such as indexation, which replicates benchmark indexes according to market capitalization. Mr. Cheung also said he sees the funds increasingly diversified across geographies and classes, including commodities and alternative investments.

SSgA is the investment management arm of Boston-based State Street Corp. It has a total $1.9 trillion in assets under management.

By Kevin Plumberg