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Jan 19, 2016

Saudi Arabia to create new SWF amid declining income

New fund could invest directly in companies, skipping asset managers

Saudi Arabia plans to create a new sovereign wealth fund (SWF) that will likely skip asset managers and invest directly in companies to maximize profit, Reuters reports, citing unidentified sources familiar with the matter.

The new fund, which could be up and running within a year or two, may focus on investing in companies in the transportation, industrial and chemicals industries while steering clear of the energy sector, one of the sources says, according to the newswire.

It’s not clear how the move would affect the Saudi Arabian Monetary Agency (SAMA), which currently controls $628 bn in net foreign assets as an SWF for the government of Saudi Arabia. Although the make-up of SAMA’s investments is confidential, Reuters says equities account for only about 20 percent of the SWF’s holdings; US treasuries and deposits with foreign banks are thought to make up the bulk of the fund.

The size of the new fund is not yet known, and the sources say the Saudi government sent out a request for proposals to banks and consultants toward the end of last year to seek advice on how to structure the fund.

Saudi Arabia’s budget deficit has reached record levels as the price of oil, the nation’s main source of income, has plunged in the last two years. It has lost more than $100 bn in net foreign assets in the last 18 months.

Other SWFs are also changing the way they manage their money as state income dwindles. Last November, the Ireland Strategic Investment Fund said the government would withdraw billions of dollars to spend on boosting the Irish economy. The Financial Times reported in December that SWFs from the Middle East withdrew $19 bn from asset managers in the third quarter, the fastest rate of withdrawal ever.