GLOBAL - Sovereign wealth funds (SWFs) are preparing to make use of the in-house nous they’ve built up in recent years to invest directly, according to a report published today by the consultancy Monitor.

The report, which examined 1,400 transactions involving 24 funds over the past decade, identified direct acquisitions by 21 SWFs last year, compared with 17 in 2008 - in apparent bids to improve returns via opportunistic investments in commodities and distressed European assets.

According to the report, alternative assets will become increasingly important for these funds as developed market equities and government bonds fail to deliver the returns demanded by state owners. These include the Chinese government, which last year instructed its fund, the Chinese Investment Corporation, to improve short-term returns.

Alpha returns are likewise driving SWFs towards emerging markets, which accounted for more than 60% of fund investment last year, in contrast to previous years dominated by investment in Europe.

However, the primary focus remains on Asia, with India, Singapore, Indonesia and Malaysia, as well as China, accounting of the 41% of total direct investment. The data also revealed a nascent interest in Latin American markets, with $3bn (€2bn) invested in Brazil last year alone.

Despite disappointing equity returns and the noticeable shift towards direct investment and alternatives, SWFs will continue to hold minor shareholdings in a larger number of listed companies, according to the report.

In a rebuttal of continuing concerns over the supposed political motivations of SWFs, the report’s authors claimed these funds would continue to act as “financial entities, pursuing economically driven strategies”. 

It did acknowledge that Middle Eastern funds - excepting those, such as the Libyan Investment Authority, whose assets have already been frozen - risked antagonising in local management if they exceeded their role as “constrained foreign investors”.

“Such potential misunderstanding could adversely affect capital movements, financial integration and ultimately the global imbalances that SWFs could contribute to absorbing,” said the report.

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