Saudi sovereign fund could be global leader

While the amount is modest compared to other state funds in the region, the Saudi one could eventually become one of the world's largest, overtaking that of the Abu Dhabi Investment Authority which is thought to have assets valued at more than $850bn.

Until now, the investment policy of the Sama, which acts as the country's central bank, has been mainly conservative, focused on US treasury bonds and to a much lesser extent stocks.

If the Kingdom's sovereign fund does grow to the extent speculated, the impact on global markets could be influential. With an estimated budget surplus in 2007 near to $100bn no other oil exporting country has as big a potential to inject cash to its investment fund from export revenues.

The impact could be immense and change the landscape of global investment should the Saudi fund and others grow and continue to invest in stocks internationally.

$20 trillion fund

Some see the funds rising to $20 trillion in the next five years and becoming more important than hedge funds and private equity, as the main drivers of global markets as petroleum producers seek to place their huge and growing currency reserves in western and Asian businesses.

US deputy treasury secretary Robert Kimmitt says that investments are welcome and not feared 'but the growth of funds, both in number and size, does require vigilance'.

But Angel Gurria, secretary-general of the Organisation for Economic
Cooperation and Development, says protectionist fears about the influence of sovereign funds have so far been unjustified and that they could help global economic imbalances.

Investment strategies

Sovereign wealth funds have longer investment strategies and can accommodate much bigger fluctuations in their balance sheets than hedge funds or private equity, which need to generate constant streams of cash to finance their operations. As a result sovereign funds can act as a source of stability and liquidity rather than create volatility in markets.

Some, like Citgroup's Michael Klein, believe that 'the greatest single benefit to the longevity of the US and UK financial structure is investment made by sovereign wealth funds into financial institutions'.

In recent months the funds have injected $60bn into western banks hit by the US sub-prime lending crisis, but even that amount is less than three per cent of the estimated $2.5-3 trillion held by the 15 countries that operate sovereign funds.

Nevertheless any moves by the planned Saudi fund, which is likely to be administered by the Ministry of Finance's Public Investment Fund, will be cautious due to the excess of popular bias against emerging sovereign funds Al-Jasser says.

'People are assuming that sovereign wealth funds are guilty until proven innocent. Hedge funds have not been regulated in spite of all the problems they have caused,' Sama's vice governor points out.

See also:
World's richest sovereign wealth funds