Morgan Stanley: SWFs To Lose 25% This Year

HONG KONG (Reuters) – Sovereign wealth funds (SWFs), once considered Wall Street’s saviors, may have suffered portfolio losses of as much as 25 percent so far this year due to the global financial crisis, Morgan Stanley analysts said in a note on Friday.

Stephen Jen, the firm’s global head of currency research, and Spyros Andreopoulos estimated sovereign wealth funds had total assets under management of $2.3 trillion as of the end of October.

The analysts cut their forecasts for growth in assets of the state-run investment pools to $10 trillion by 2015 from a previous estimate of $12 trillion, in a telltale sign of how massive market volatility is hurting even the biggest of investors.

“Lower oil prices, lower export growth rates, capital flight that has drained official reserves and new domestic fiscal needs may lead to a less rapid pace of asset accumulation for SWFs,” Jen and Andreopoulos wrote.

The estimated losses were based on the assumption that the average sovereign fund portfolio has a breakdown of 25 percent bonds, 45 percent equities and 30 percent alternative investments.

Sovereign funds were instrumental in providing capital to struggling investment banks in Europe and the United States earlier in the crisis. State Street Global Advisors estimated the funds invested $80 billion in the banking industry between 2007 and April 2008.

However, the purchases fell sharply as global equities stumbled into a bear market and bank-to-bank lending totally froze.

Because of the magnitude of the financial market breakdown, Jen and Andreopoulos said sovereign funds could greatly pull back from the risky assets they were established to buy in the first place.

“Bailing out of banks and financial institutions and other “one-off but large fiscal operations could lead to SWFs being forced to slow down the pace of their investments, or, in extreme cases, liquidate parts of their portfolios,” they said.

(Reporting by Kevin Plumberg; Editing by Anshuman Daga)