The Wall Street Journal-20080126-Money Managers in U-S- Hanker for a Slice of Sovereign-Wealth Pie
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Money Managers in U.S. Hanker for a Slice of Sovereign-Wealth Pie
There is a new courtship ritual among U.S. money managers hungry for business: They are wooing the world's cash-rich foreign governments.
Firms including State Street Corp., Franklin Resources Inc. and Janus Capital Group Inc. are pursuing foreign-government investment funds -- which operate from Abu Dhabi to Beijing to Oslo -- in hopes of managing a pile of their money in return for lucrative fees.
Foreign-government money is growing in importance in the U.S. financial world. In recent months, Chinese and Middle Eastern governments have bought sizable stakes in Wall Street firms, including Citigroup Inc. and Morgan Stanley.
Money managers have long helped foreign governments invest their assets. But as these "sovereign wealth" investment funds have started shifting away recently from traditional U.S. Treasury holdings to riskier investments like stocks and real estate, the job has gotten more lucrative.
One client being watched closely is the $200 billion China Investment Corp. fund. The fund is planning to invest about a third of its money abroad, and earlier this month was slated as the deadline for financial firms world-wide to apply to help with investing. The fund is estimated to have taken in more than 100 applications, and could potentially notify winning managers in coming weeks.
It is much bigger than some recent Asian offerings, like China's national social-security fund, which meted out an initial $1 billion to managers including AllianceBernstein Holding LP and and Allianz Global Investors in 2006.
For money managers, this source of revenue has become important as inflows from defined-benefit pensions and certain mutual-fund markets have flattened industrywide.
Government-affiliated funds like these are set up by nations to help invest their money. Some of these funds, particularly in the Middle East, have ballooned in size as oil prices have soared. In Asia, meantime, the export boom is fattening government coffers.
Altogether, government funds are home to about $2 trillion to $3 trillion world-wide, and are expected to top $12 trillion in a decade, according to British bank Standard Chartered PLC.
These funds could outsource as much as 20% of assets to external investment firms, and $200 billion a year may be up for grabs among money managers in the next five years as the funds increase, according to Morgan Stanley research. That would add to areas like the $12 trillion U.S. mutual-fund industry on which most managers already focus.
Merrill Lynch & Co. estimates a potential shift of $1.5 trillion to $3 trillion of assets into the global asset-management industry in coming years, generating $4 billion to $8 billion annually in extra fees.
While payment structures vary, outside managers have been known to earn as much as 0.4% of such institutional assets in fees.
More funds are focused on areas like emerging-market debt to boost returns and lower exposure to the weak U.S. dollar, said Bill Yun, president of Franklin Templeton Institutional.
"It is not just the inherent growth of those pools of assets," but the fact that they are dabbling in more complex and sophisticated investments that makes them appealing, said Jay Hooley of State Street Corp. at a recent conference.
Challenges are emerging for the firms scrambling for a share of this business. In particular, competition has given foreign funds more leverage in negotiating contracts and hiring outside managers. Many managers said sovereign funds are favoring firms with local offices or other investments in the country.
You "can't just fly in and fly out" to win business, because the "funds are becoming more sensitive to your commitment to the region," said Stephane Prunet, global chief executive of Axa Rosenberg, part of Axa Investment Managers Ltd. Axa Rosenberg's office in Singapore, for instance, has helped the firm win more business in the country.
Invesco Ltd. said its operations in China have been helpful in managing money there. Mr. Yun of Franklin Templeton said the same is true of his firm's Beijing office.
Many funds also are doing more of their own screening for external managers rather than relying on outside data or advice from consultants, said Ric van Weelden of Janus Capital International.
Norway's government pension fund, for instance, also has investment teams in New York, Shanghai and London to help keep a close eye on their external managers, said Mr. van Weelden. This means more competition in the search for new investment ideas and managers, and, in some cases, more demands.
As foreign-government funds invest in Wall Street banks, it is stirring up protectionist fears over how much say they might have in the firms' operations. Criticism also is mounting over poor financial disclosure, given many of the funds offer scant data on their investments.
To counter these issues, China's fund has been disclosing criteria for choosing external money managers. The fund explains that applicants must have more than six years of investment experience in the asset class for which they apply, and must already have total assets under management of at least $5 billion, with no severe regulatory penalties in the past three years.
The window for opportunities like these, while open now, also could snap shut in coming years, because many government funds are ramping up their own in-house expertise.
