Friday, January 18, 2008
Sovereign Wealth Funds and your stock portfolio
America has become one big yard sale, filled with shoes, lunchboxes, and puzzles with pieces missing.
There's been a lot in the news about sovereign wealth funds. They are taking large stakes in our battered financial stalwarts and partnering with others in major buyout deals. The name might bring to mind images of Arabs rich from the world's addiction to oil, but that is but one face of the these powerhouses.
Singapore has a very long-established SWF, as does Norway, South Korea, Australia, Canada, Venezuela, and even Alaska. China finally set up its own last year, hoping to more efficiently deploy its hoard of currency reserves.
They are also lightning rods for political controversy and opportunism. Hillary Clinton has weighed in on their political motives. New York's other senator, Charles Schumer has endorsed these deals, largely because he's in Wall Street's back pocket.
Recently, The Economist published a great article on the risks and rewards of sovereign wealth funds. As this piece from the International Monetary Fund(IMF)points out, transparency is the biggest beef that people have with them. Treasury Secretary Henry Paulson would like to see the IMF develop guidelines for the funds in hopes that this would prevent a protectionist backlash.
So is there any money to be made piggybacking on their stakes or trying to anticipate their next move? That depends. Are you patient? Do you have an enormously long time horizon? Like politicians, investors must question the motives of SWFs. Some stakes are about achieving political goals, rather than just making money. Wall Street wants and needs these players, especially since hedge fund and private equity money is drying up.
If you think that political sanctions won't happen or will be mild, then you might possibly get a great deal on Merrill Lynch(MER), Citigroup(C), or other fallen giant. If I had to put my money on a horse in this race, I'd pick Citigroup. They have a global footprint and every measure will be taken to make sure that it doesn't fail.