Sovereign wealth funds (SWFs) are holding on to their cash and waiting for the markets to bottom before committing more money to investments. And even when they do decide to raise their holdings, they will remain passive long-term investors and have no desire to behave in an activist manner towards their portfolio companies. These are among the findings of a recent survey by Financial Dynamics. SWFs have existed since the 1950s, but their asset size and clout in the investment community have grown dramatically over the past 10 to 15 years. Among the more prominent investments made by SWFs recently were those that involved the rescue of US banks that fell victim to the subprime crisis. For example, Singapore's Temasek Holdings bought a $5 billion stake in Merrill Lynch, while Abu Dhabi bought a $7.5 billion stake in Citigroup. The role of SWFs has come under scrutiny in recent months, mainly due to concerns over their growing size and their tendency in recent years to buy stakes in high-profile companies in other countries. In October last year, members of the International Working Group of Sovereign Wealth Funds (IWG) agreed on a set of 24 principles and practices and are planning to create a permanent SWF body. For the survey, Financial Dynamics interviewed senior executives from major SWFs worldwide, whose combined assets make up more than half the $5 trillion worth of total SWF assets. The research focused on current SWF attitudes towards valuations, investment strategies and where they see regional investment opportunities. The survey found that SWFs are broadly adopting a very cautious approach to the current market, expecting better value to materialise later this year. They are primarily interested in acquiring minority equity stakes in listed companies, and are particularly cautious about supporting further bail-outs of distressed companies. The most attractive regions for investment are Brazil, China and areas of Central America, and the funds have a five-year investment horizon, on average. While a number of key SWF investments have been made over the last 18 months and SWFs are still interested in broadening their portfolios, the findings showed that this particular class of investor is waiting for the right time to make deep value investments. "Valuations of the assets we are targeting are certainly more attractive but we still feel they have further to go during 2009," says one SWF executive that took part in the survey, but declined to be named. "Our view is that valuations may bottom out towards the end of this year." SWFs are not keen to participate in further bail-outs of companies in financial difficulties given the number of funds that are now sitting on major capital losses from previous investments. Some SWFs are actually reducing their exposure to the listed market, according to the survey results. At least one adopted this strategy as early as 18 months ago, having noticed early warning signs of market excesses. Another executive commented that corporate governance and management quality were also very important issues in the current climate. When determining the value of prospective investments, the sustainability and growth of dividend streams are as critical as capital growth for these SWFs. The funds surveyed also said they preferred to invest through minority participation by way of capital injection, with none of them expressing the intention to control or manage investee companies. In the current market conditions, debt-for-equity swaps are increasingly viewed by SWFs as an efficient way to invest. SWFs see themselves as passive and therefore fundamentally very different from hedge funds or private equity investors. "It is very unfortunate that we get tarred with the same brush as alternative assets such as hedge funds and private equity. In complete contrast to these asset classes, we are passive investors," one survey respondent says. "Our normal form of investment is buying minority shareholdings in tradable liquid assets. We do not seek to engage in confrontational situations or exert influence. If we don't like management's strategy, or the strategy changes, we sell." | 
