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Kuwait’s Future Generation Fund booming amid malaise in regional SWF governance

Kuwait is making strides in an effort to invest its way out of dependency on oil money. But while investment returns are flowing in, sovereign wealth fund governance in Kuwait and the region is unwell

Growth in the fund over the past five years has exceeded the country’s total revenue from oil for the same period The uncertainty now hanging over the KIA is emblematic of a broader malaise that’s paralyzed policymaking Several of the largest SWFs in the region were cited for insufficient disclosure and lack of trust

Kuwait is making strides in an effort to invest its way out of dependency on oil money.

The Future Generations Fund (FGF), a national savings pot designed to help the country prepare for life after oil, has risen to about $700 billion

Its assets were valued at about $670 bn at the close of the last fiscal year on March 31.

The fund, which is managed by the Kuwait Investment Authority (KIA), has more than 50% of its investments in the US, where equity markets have been on a tear. The benchmark S&P 500 Index surged more than 8% last quarter, its fifth consecutive three-monthly gain, while the MSCI World Index gained more than 7%.

The recent gains follow a record 33% increase during the last fiscal year, according to Finance Minister Khalifa Hamada. Growth in the fund over the past five years has exceeded the country’s total revenue from oil for the same period, he said.

Kuwait recorded $221 bn in total oil revenue in the last five years.

The KIA is the world’s oldest sovereign fund and among the largest, with stakes in ports, airports, and power distribution systems around the world. The FGF can’t be touched without approval from parliament.

Norway’s Government Pension Fund is the world’s biggest sovereign wealth fund with $1.3 trillion of assets, according to rankings by the Sovereign Wealth Fund Institute. That’s followed by the China Investment Corporation, which manages $1 trn, and the Abu Dhabi Investment Authority, known as ADIA, with $649 bn.

The FGF grew at a record rate of 33% in the year to March 31, Hamada said.

The General Reserve Fund, or the treasury, was “completely depleted” last summer before the government took a number of measures that added $23.3 bn to it, allowing the government to meet its monthly financial commitments, the minister said.

State assets, which include the FGF, the General Reserve Fund, and domestic public property, rose 19.2% in the same period, according to Hamada.

KIA’s board unfilled

KIA has been in limbo since its board’s tenure expired over two months ago.  

The uncertainty now hanging over the KIA is emblematic of a broader malaise that’s paralyzed policymaking, prompted rating agencies to warn of downgrades, and perversely left the government of a major OPEC crude exporter scrabbling for cash.  

It’s a  deadlock that’s blocked the state from borrowing and left it with barely enough to pay public sector salaries. 

The dispute is also delaying investment and economic reforms, including an overhaul of the welfare state the government says is needed to end eight consecutive years of budget deficits.

Kuwait’s Public Institution for Social Security thriving

Kuwait’s Public Institution for Social Security (PIFSS) had its best-ever annual performance, emerging as a new regional investment powerhouse despite political deadlock in the country.

The $134 bn pension fund, which owns a quarter of US private equity firm Stone Point Capital, recorded a 20.9% growth in assets in the year ended March 31, according to a recent statement.

Cash now accounts for 4% of its investments, down from about 11.5% a year ago.

The performance reflects the fund’s “robust” investment policy and the record performance of capital markets, said Director General Meshal Al-Othman. 

“The management follows a conservative investment strategy well positioned to absorb and overcome expected fluctuations in international markets in the medium-term,” he said.

PIFSS also owns 25% of Oak Hill Advisors and 10% of TowerBrook Capital Partners.

Regional SWFs’ governance issues 

A study by Global SWF singled out several of the largest entities in the region for insufficient disclosure and lack of trust.

Some of the Gulf’s largest sovereign wealth funds (SWF) are the world’s worst performers regarding governance and resilience, according to a Global SWF study of 100 sovereign wealth and pension funds.

For investors, uncertainty and a lack of trust in the region’s leading funds have grown amid insufficient disclosures and a lack of transparency.

The Global SWF study singled out three of the Gulf’s largest funds.

The Abu Dhabi Investment Authority (ADIA) has an “increasingly opaque annual report” that no longer reveals details, like the fund’s relationship with the government.

The Qatar Investment Authority’s (QIA) website no longer includes an organizational chart, and its governance section is less comprehensive than before.

Meanwhile, the Kuwait Investment Authority (KIA) “provides less and less clarity around its two funds and how liquidity is affecting them.”

Uncertainty around wealth funds developed further after “significant withdrawals” from some entities in the region over the past year battling COVI-19 and falling oil prices.

Introduced by Global SWF in 2020, each entity is rated according to a GSR scoreboard composed of ten elements related to governance, ten on sustainability, and five on resilience. The results are converted into a percentage scale for each of the funds.

Only four funds in the Middle East exceeded the 50% mark: UAE SWFs Mubadala Investment Co. and DP World, the Libyan Investment Authority (LIA), and Bahrain’s Mumtalakat.

Gulf SWFs global footprint

According to SWF Institute’s rankings, Norway’s NBIM is the world’s biggest with $1.28 trillion in total assets.

Overall, Gulf SWFs account for seven of the top twenty-five.

Gulf SWFs are among the largest capital market investors and own 40% of all SWF assets.

Saudi Arabia’s Public Investment Fund (PIF) led the charge last year, capitalizing on opportunities to scoop up discounted the US and European blue-chip equities in the wake of the pandemic.

Based on Fitch Ratings’ 2020 report, Emirati, Qatari, and Kuwaiti SWFs are believed to have “underpinned the resilience” of their sovereign ratings despite the pandemic and low oil prices.