Cheap Oil Saps Gulf Sovereign Wealth Funds

Cheap Oil Saps Gulf Sovereign Wealth Funds

By Shiv Mehta, CFA | Updated December 07, 2015

According to a report published by the Financial Times on Sunday, the rate at which Gulf sovereign wealth funds have redeemed their money from asset managers has increased to a record high. The primary factor driving this massive pull-out has been declining oil prices that are hurting the economies of Gulf countries and compelling their sovereign wealth funds to redirect cash to support their economies.

Redemptions from Sovereign Funds Soar

According to the data provider eVestment, the total amount of money withdrawn from asset managers amounts to $19 billion in the third quarter, which hurts the managers’ assets under management (AUM) and causes concerns about their short term profitability. However, some analysts say that the quantum of withdrawals is currently understated as some of the asset management companies, such as Blackrock, do not disclose their AUM for sovereign funds. According to Morgan Stanley, however, Blackrock has suffered withdrawals of around $31 billion.

The report stated that there are number of asset managers such as Aberdeen Asset Management, Franklin Resources Inc. (BEN) and Northern Trust Corp. (NTRS) who have admitted to these withdrawals. Aberdeen’s chief executive, Martin Gilbert, said, “If the oil price remains low, we will see more redemptions from sovereign wealth funds.”

Which Managers Will Continue to Face Redemption Pressure?

The assets managers who have received a majority of their AUM from sovereign wealth funds are at greater risk of lower earnings because redemptions will probably not slow in the coming quarters. Robert Callagy, an analyst at Moody’s Investor Services, said, “I don’t think [the third-quarter redemptions from sovereign wealth funds] were a one-off.” He added, “Firms that have average performance and provide strategies that are not very differentiated from their peers are probably the ones most challenged.”

According to Morgan Stanley, the firms that have high exposure to sovereign wealth fund redemptions include Aberdeen, BlackRock Inc. (BLK), Invesco Ltd. (IVZ), Ashmore and Franklin Resources. Overall, sovereign wealth funds have assets worth approximately $7 trillion, out of which one-third is managed by external asset managers. According to the reports, Saudi Arabia’s sovereign wealth fund has withdrawn tens of billions of dollars from asset managers because of low oil prices.

Passive Asset Managers Are Also Suffering

The asset managers that offer passive investment strategies are suffering the most from redemptions because sovereign wealth funds are spooked from global volatility across asset classes and are looking for actively managed products, says Peter Laurelli, head of research at eVestment. He added, “Passive equity is most under pressure. Sovereign funds want to reduce exposure to long-only passive strategies in this period of heightened volatility.” These sovereign wealth funds are increasingly looking for alternative investments and targeting those asset managers that offer alternative investment strategies.

The Bottom Line

With the price of oil tumbling over the past year, the sovereign wealth funds of oil economies in the Gulf have felt the need to inject more cash into their economies. As a result, they have withdrawn their money from external asset managers. Analysts expect that these redemptions will continue till oil prices stablilize.
Read more: Cheap Oil Saps Gulf Sovereign Wealth Funds (BEN,BLK,IVZ)
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