The Scariest Funds of All

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BUSINESSWEEK l NOVEM BE R 12, 2007

By Jack Ewing

Illusraion by Sco Mencin

Sovereign uns wor $2.8 rillion rom

Cina, Russia, an e Mieas are

ramaically canging e nancial ma

the scariest

funds

of all


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the Securities & Exchange Commission, said in a speech at

Harvard University on Oct. 24.While ew unds so ar have thrown their weight around in

pursuit o political and strategic goals, state-controlled com-panies rom the same countries have done so, and many ear

the unds will ollow in their ootsteps. Russias state-ownedenergy giant Gazprom, or instance, cut o gas supplies to

Ukraine last year aer relations between the two countriescooled. In October, Industrial & Commercial Bank o China

paid $5.6 billion or 20% o South Aricas largest bank, andlast year state-owned oil company

CNOOC bought into a Nigerian oil eldor $2.3 billion. Dubai unds, meanwhile,have sought to bolster their hometowns

reputation as a world nancial capital

and hone their investing skillsby taking

stakes in NASDAQ and the London Stock

Exchange.

I Western ocials are worried aboutthe unds, they have only themselves toblame. The insatiable appetite o Amer-

icans and Europeans or oil and cheapmanuactured goods has fooded devel-

oping countries with oreign currency.Western policymakers have spent years

pushing to open global capital markets,creating the conditions that allow sov-

ereign wealth unds to thrive. And as U.S. credit markets limpthrough the subprime mortgage crisis, the sovereigns may be

the best place to go or nancing. The U.S. is going to haveto import large amounts o capital rom the rest o the world

as long as theres a big imbalance between what we save andwhat we spend, says Robert D. Hormats, vice-chairman o

Goldman Sachs (International).Saudi Arabia, China, and others have traditionally plowed

their reserves into U.S. government bonds earning perhaps5% annually, but theyre no longer satised with such paltry

Even among money managers, Gao Xiqing isnt a household

name. Yet the 54-year-old civil servant in Beijing oversees apile o cash that would make any hedge und manager swoon.

Gao is general manager o the $200 billion China InvestmentCorp., created this year to invest the mainlands oreign cur-

rency reserves in global capital markets. Dont mistake himor some aceless Chinese bureaucrat, though. He graduated

rom Duke University School o Law in 1986, spent two yearswith a big New York law rm, then went home to help cra

Chinas securities regulations.Its a combination that the global -

nancial Establishment better get usedto: a seemingly limitless pool o capital

overseen by Western-trained managers.U.S. oicials have been retting about

China Investment Corp. and other so-called sovereign wealth unds, calling

on such outts to provide greater insight

into their operations, but theres little theWest can do about these unds. Russia,the Persian Gul states, China, and oth-

ers have amassed ortunes rom exportso gas, oil, or manuactured goods, and

now theyre looking to supercharge thereturns theyre getting rom that money.

All told, these unds today control morecash than the worlds hedge unds com-

bined: $2.8 trillion vs. $1.7 trillion, according to Morgan Stan-ley. By 2011 that gure may hit $8 trillion or more.

For Americans and Europeans, the big worry is what sov-ereign und managers plan to do with their huge pots o cash.

Because their interests dont always match those o the West,the looming question is whether theyll simply go or maxi-

mum prot, or pursue more ominous political goals. The in-creasing economic clout o undemocratic governments could

mean that our markets will be less transparent, less yieldingto outside law enorcement, Christopher Cox, chairman o

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New Zealander who previously headed the Asian operations

o French ood giant Danone.

Its no surprise that investment banks and asset managerslove the sovereigns. While such unds are still only about aneighth the total size o the worlds pension unds (which have

$21.6 trillion in assets), theyre becoming increasingly impor-tant customers or investment banks. Norway uses more than

50 outside rms to help manage its $367 billion und, hand-ing out $73 million in bonuses last year to the likes o Lehman

Brothers and Morgan Stanley. All told, the sovereigns are like-ly to ork over ees o $4 billion to $8 billion to asset managers

worldwide over the next ve years, Merrill Lynch estimates.The big investment banks are salivating at the prospect o

[doing business with] these unds, says Kenneth S. Rogo, aproessor at Harvard and ormer chie economist at the Inter-

national Monetary Fund.Many economists argue that the sovereigns make global

capital markets saer. The unds dont have to worry aboutpanicky investors withdrawing money when markets tank,

and most dont have to make regularpayments the way pension unds do.

That means they can take the long view,helping stabilize the prices o stocks and

bonds that they own. We are able to holdon to our positions in times o turmoil,

says Martin Skancke, director general othe Asset Management Dept. in the Nor-

wegian Finance Ministry, which overseesthe countrys Government Pension Fund.

(Despite its name, the agency doesntactually pay pensions and is instead de-

signed to build a national nest egg or theday when Norways oil reserves run dry).

Sovereign wealth unds may also takea more gentle approach to acquisitions

than private equity or hedge und in-vestors, whose aggressive restructuring

oen provokes public ire. When DubaiInternational Capital bought British

theme park operator Madame Tussauds

returns. In the past year, investment operations controlled by

the emirate o Dubai have bought New York clothing retailerBarneys and German industrial packaging maker Mauser,

and have taken 3% stakes in both Airbus parent EADS andICICI, Indias No.2 bank. The Government Investment Corp.

o Singapore, a country known or stubbornly pursuing itsown interests, owns some $80 billion in real estate assets

worldwide, including such trophies as the 60-story AT&TCorporate Center in Chicago, Tokyos Shiodome City Center,

and Merrill Lynchs European headquarters in London. AndGaos China Investment Corp. in May agreed to pay $3 bil-

lion or a 9.9% stake in private equity rm Blackstone Group(although the shares have since lost 18% o their value).

The unds are already becoming the go-to guys or nancialheavyweights the world over. In July, or instance, Londons

Barclays bank needed billions in ast cash to bolster its bidor Dutch rival ABN Amro, but the subprime crisis was rag-

ing and the usual sources o credit were in lockdown mode.Barclays President Bob Diamond hopped an overnight fight

to Singapore or an audience at the art deco headquarters o

on o the city-states sovereign unds, Temasek Holdings.Within hours, Temasek pledged $5 billion. The Barclays bidultimately ailed, but the transaction le Temasek with a 2%

stake in the bank. And in September, Temasek scored an M&Avictory when the und teamed up withy its subsidiary Singa-

pore Airlines to take a 24% stake in China Eastern Airlines,acing out Hong Kongs Cathay Pacic.

Temasek has a track record that any o the newcomersmight envy. Founded in 1974 to invest Singapores budget

surpluses, Temasek has averaged a return o 18% annually andnow holds assets worth $110 billion. Its diverse portolio in-

cludes 25% o Indian broadcaster INX Media, 8% o Austrianvaccine-maker Intercell, and a slew o Asian banks includ-

ing 5% o Bank o China. Temasek is run by the wie o PrimeMinister Lee Hsien Loong, Ho Ching, who holds a masters

degree rom Stanord University. And the und also includesoreign talent, such as second-in-command Simon Israel, a

J O E K L A M A R / A F P / G E T T y I M A G E s

BUSINESSWEEK l NOVE MB ER 12, 2007

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fear factorWhile some say the unds are good or markets, others ret about their growing clout

te Negaives

1Mos are nooriously secreiveabou eir aciviies, making oer

invesors guess wa eyre u o

2By buying ino sraegiccomanies abroa, e unsmay give governmens unueinfuence over inusry

3I oo many o e uns sowa srong reerence oremerging markes, e ollarcoul umble

te posiives

1te uns coul el sabilizemarkes because ey inves

long-erm an on nee o caero anicky cliens

2Some, suc as Norways un,ave aggressively use orbeer cororae governance

3te uns yically ave asrong aeie or risk, elingsore u new venures anemerging markes

Abu dabi$900

Singaore $438Norway

$367Kuwai

$213Cina

$200

Russia$133

Qaar $50Ausralia

$49Alaska

$39Brunei

$30

suPersiZed soVereiGnsValue o major national investment unds, in billions*

*Highest estimateData: Peterson Institute for International Economics


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hard or Western policymakers to argue that the sovereigns

should be more open without imposing similar rules on hedgeunds or private equity, which are generally no more transpar-

ent. The best hope is that sovereign unds decide its in theirinterest to open up.

One o the biggest victims o the rising power o the sover-eigns could well be the dollar. As the unds shi their enor-

mous assets away rom U.S. Treasury bills, or instance, oneo the greenbacks biggest pillars o support could start to

crumble. And with the unds showing a strong preerence oremerging-market assets, the dollar could suer even more.

Indeed, many o the unds dont seem very interested in buy-ing in the U.S. at all. Why would you want assets denomi-

nated in a declining currency? asks Merrill Lynch economistAlex Patelis.

So ar, the track record o the sovereign unds suggests theywill move careully to avoid provoking major opposition. Last

year, Dubai International Capital gave up an attempt to buythe Liverpool soccer team amid ervent public opposition,

though DIC cited price as its reason or withdrawing. And

when Dubai was ready to seal a deal with Nasdaq, it spent bigmoney on Washington lobbyists and careully brieed key leg-islators. Its not our country, says Soud Baalawy, executive

chairman o Dubai Group. Whether we like it or not, we haveto adapt. ^

With Chi-Chu Tschang in Beijing, Assif Shameen in Singa-

pore, Stanley Reed in London, Jane Sasseen and Emily Thorn-

ton in New York, and Jason Bush in Moscow

in 2005, or instance, it le management in place. We dont

have the resources to manage companies or spend monthsnding replacement management teams, says Sameer Al

Ansari, CEO o Dubai International.Western policymakers ret that, like hedge unds, no one

knows or sure what most sovereign unds are up to. Withoutreliable inormation about their investment strategies and

holdings, rumor mongering takes over, which can create tur-moil in the markets. While Norway issues a detailed annual

report, the Abu Dhabi Investment Authority, with holdingsestimated at as much as $875 billion, discloses almost no in-

ormation. Analysts assume most o the Abu Dhabi money isin ultrasae U.S. Treasury bills, but a recent Citigroup report

said the und also has extensive investments in Middle Eastbanks as well as two cement companies in the region. Through

its Mubadala Fund, with a value o some $10 billion, the gov-ernment o the United Arab Emirates is also experimenting

with riskier investments. In September it paid $1.35 billion ora 7.5% stake in private equity rm Carlyle Group.

To counter concerns over the unds lack o transparency,

U.S. and European ocials are pressing the sovereigns todisclose more about their activities. Leaders o the Group oSeven nations, meeting in Washington in October, asked the

International Monetary Fund to examine the issuealthoughits unclear what the IMF might be able to do. The goal in

pushing or more accountability is to head o harsher mea-sures that might hurt U.S. commercial interests abroad, says

Clay Lowery, Assistant Secretary or International Aairs atthe Treasury Dept. We are worried about an over-reaction

leading to protectionism, putting up barriers in the U.S. tolegitimate investment, Lowery says. In any event, it may be

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NOVE MB ER 12, 2007 l BUSINESSWEEK

By Eamon Javers

The huge wealth o sovereign unds hassparked lots o anxiety in Washington.But one o the biggest such outfts isheadquartered in Juneau, Alaska.

Since 1976, 25% o the statesmineral and oil revenue has gone intothe Alaska Permanent Fund. Now worth$40 billion, its goal is twoold: to gener-ate dividends or residents, and to buildup unds or the day when the oil runsout. In recent years, a small amount hasalso gone to pay or capital projectsaround the state. This year, the 604,000Alaskans each got $1,654. For a placelike Alaska, this is an extreme amounto money, says Michael J. Burns, chie

executive o the Permanent Fundsmanagement corporation.

Burns runs the outft much like apublic pension und in the Lower 48.Early on, it primarily invested in Treasurybills and corporate debt, but managershave gradually embraced greater risk.That shit allowed the Alaskans to diveinto venture capital and hedge unds,including a $40 million investment inBlackstone Capital Partners in 2005.Now, publicly traded stocks make up53% o the und, bonds 29%, realestate 10%, and alternative assets, suchas hedge unds, 8%. Alaskas votersown, among other things, more than 7million shares o General Electric, an

apartment building on East 87th Streetin Manhattan, and stakes in our dozenprivate equity unds. All the details arepublicly disclosed.

Although oil production in Alaska isdeclining, the state contributed about$575 million in new petrodollars to thePermanent Fund this year. But thatwas dwared by the unds $5.4 billionin investment returns. The hety payois a sign that the undi not the stateitselis already weaning itsel rom oil.Burns points out that many sovereignunds around the globe ace a commonproblem. When youre in the extractionbusiness, he says, you know theres anend to what you can get rom the earth.

the froZen chosentanks o is ieline ayo, Alaskaas $40 billion o burn


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CopyDesk Header Ino

(Do not delete the sentence above)

Slug: sovereign46

Reporter/Writer: Ewing

NY Editor: Rocks

Copy Editor: Newman


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COMPANY INDEX


China Investment Corp.

Morgan Stanley (MS)

Gazprom

VTB

Airbus

EADSGoldman Sachs (GS)

Dubai International Capital

Mauser

Government Investment Corp.

Merrill Lynch (MER)

Blackstone Group (BX)

Barclays (BCS)

ABN Amro (ABN)

Temasek Holdings (CK)

JPMorgan Chase (JPM)

Citigroup (C)

Abu Dhabi Investment Authority

Carlyle GroupDubai Group

HSBC (HBC)

Dubai Investment Group

Dubai Holding


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DESK QUERIES: Please DO NOT return story to desk without conrming or correcting.


Duke University Law School (we show its School o Law) ... sure

law rm is Mudge Rose Guthrie Alexander & Ferdon, dotters show -- no need to name

Mauser as industrial packaging maker (dotters nd its an arms maker) --dierent company. this one makes steel drums

tk-story AT&T center (dotters show its 60 stories) .. 60 is ne

Barclays (its Barclays) ... sure

Bob Diamond, chie operating ocer (we show Robert E. Diamond, president and executive director) ... Robert E. Diamond Jr.,president

Temasek und (we show its Temasek Holdings) ... Temasek Holdings

1974 as year Temasek ounded (dotters show 1975) ...1974

Citicorp (Citigroup?) ... citigroup

m.i. S. ok or Rogo?

Abu Dhabi Investment Authority & Corp. (we dont show the & Corp. but only Abu Dhabi Investment Authority) ...Abu Dhabi

Investment Authority is ne

Mubdala und (we show Mubadala Fund) ... Mubadala und (lc) is correct

The Carlyle Group (just Carlyle Group) ... no the is ok

Dubai Group (we show Dubai Group and Dubai International Capital both part o Dubai Holding) ...thats correct

Dubai Investment Corp. (we show Dubai Investment Group) ... should be Dubai International Capital ...

DIC (DIG?) ... correct second re or Dubai International Capital ...

Soud Balawy (we show Soud or Saud Baalaway or Baalaway) ...Soud Baalawy, executive chairman o Dubai Group

thanks and regards/desk

suggested hed:

The New

Flags

O Fortune

Sovereign unds rom the likes o China, Russia, and the Mideast control $2.8 trillionmore than all hedge undsand are

dramatically changing the global nancial landscape

Banks and other nancial players have been avorite acquisition targets or sovereign unds. It helps that such deals havent

created much opposition. But the unds also are interested in getting their hands on banks to gain knowhow and infuence inthe West and to bolster their nancial systems back home. Government-controlled Borse Dubai, or instance, is chasing a $6.5

billion deal that would give it a 20% stake in Nasdaq, in part because it wants to create a similar stock exchange in the Gul. AndDubai International Capital, also controlled by Dubais ruler, owns 3% o British bank HSBC, worth $6 billion. Borse Dubai also

has 20% o the London Stock Exchange while the Qatar Investment Authority has 15%.


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The Scariest Funds of All

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