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By Mike Caggeso
Chile said it has begun diversifying its two sovereign wealth funds valued at more than $17 billion – with 20% to be invested in corporate bonds and 15% in stocks by the end of the year.
"We are in transition to a new strategy," Eric Parrado, International Finance Coordinator at Chile's Ministry of Finance, said at a London conference on sovereign wealth funds, Reuters reported.
A government-appointed panel recommended changes to the funds' investment strategy. Previously, the funds allocated about 30% of assets to money market instruments. After official approval, that figure will be reduced to 5%.
Between the lines, the Chilean government is saying it's buying stocks while they're cheap.
The strategy is similarly employed by other sovereign wealth funds from China, Kuwait, Abu Dhabi and Dubai.
In recent months, sovereign wealth funds [or as Money Morning calls them, Global Cash Barons] have injected more than $70 billion into struggling commercial banks, brokerages and investment-banking institutions – most of them in the West.
In many cases – Citigroup being an excellent example – sovereign funds have snapped up prime U.S. assets with terrific long-term futures at near-term bargain prices.
Growing Global Presence
Sovereign wealth funds currently control an estimated $3 trillion in cash and other assets. That's already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].
According to the International Monetary Fund (IMF), the state-run funds could control $12 trillion by 2015. Ultimately, says Money Morning Investment Director KeithFitz-Gerald, the total could actually reach $20 trillion by the middle of the next decade.
The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 – more than half of them since 2005 – bringing the total number of funds to nearly 40.
Most recently, the funds have provided bailout capital to such heavyweights as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS).
And in doing so, these massive cash pools are highlighting potential turnaround plays for investors.
"Sovereign wealth funds provide an important data point for investors," says Money Morning Investment Director Keith Fitz-Gerald. Despite what critics say, "sovereign funds operate out in the open, and their objectives become very clear. This is in stark contrast to the secret workings of hedge funds, that operate in private, and only divulge their holdings and objectives after the fact."
News and Related Story Links:
- Money Morning:
Citigroup: Why This Turnaround Play Has Legs – Big Ones
- Money Morning:
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street"