The Rise of Sovereign Wealth Funds

Rob Mackrill - Tue 29 Apr, 2008

The world’s Sovereign Wealth Fund may have assets that exceed the US economy by 2015.

It’s a good time to run an oil business. Reuters reports:

“Shell profit beats forecast on record oil...”

“BP profit beats forecast on record oil.”

Not such a good time to run an airline...

MAXJet, Eos and Silverjet set up as specialist business class operators.

MAXjet began in 2003 and went bust in 2007. Eos, the name of a Greek god of the dawn, set up in 2004 and went bust last Sunday. In Greek mythology, Eos opened the gates of heaven every day. Sadly, its modern day equivalent just passed through them.

The UK’s AIM-listed Silverjet is the last one standing. For how long we wonder? It began operations in 2006 and Air crew website Cabin Managers strikes a cautious note. It is warning against applying for work there until the “financial picture improves”. Two proxies presumably serve to monitor the situation. The oil price and the share price. Oil is $117 and the shares, from a high of over £2 last March, now trade at 14.5p.

It’s shopping time for the world’s most celebrated investor and it certainly isn’t airlines. Indeed, a capitalist present at the inaugural flight of the Wright brothers would have shot them out of the sky, Warren Buffett once quipped.

But for the world’s greatest investor prices have come down, and it’s the moment to be greedy when others are fearful... especially when you’re sitting on a $40bn cash pile.

Buffett likes simple businesses he can understand. He likes globally recognised brands with staying power and significant ‘economic moats’ too. And he certainly didn’t become the business world’s equivalent of Croesus without recognising a good price when he sees one. Mars and Wrigley have ticked all the right boxes

Buffett has chipped in $4.4bn to Mars’s (think Mars bars, Snickers, Twix, M&M and more) efforts to buy chewing gum maker Wrigleys (think Spearmint, Jiucyfruit, Orbit, Hubba Bubba and more).

Mars is offering $23bn all told. Buffett will secure a 19% stake in Wrigley for a “discounted” $2.1bn reports The Times today. The combined Mars/Wrigley group will overtake Cadbury’s to become the largest sweet maker in the world with over 14% of the market from $27bn sales.

The spotlight now falls on the prospect of consolidation for other Charlies running chocolate factories. The UK’s Cadbury Schweppes is shortly to be demerged into chocolate business London-listed Cadbury plc and US-listed soft drinks maker Dr Pepper Snapple. Speculation is increasing that a deal between the newly demerged Cadbury and Hershey could finally happen following talks that came to nothing last year. Interesting to note that, from a quick scan of the numbers, Wrigley managed to make almost three times Hersheys’ net income last year on sales only 8% higher.

So in Mr Market’s eyes Hershey is worth slightly more than a third of Wrigley, yet in 2005 and 2006, we find the a rather different comparative performance. Hershey’s sales exceeded Wrigleys, and in 2006 it made more money

The Times describes Warren Buffett as the world’s richest man, with a fortune of $62bn. Though he’s not the richest in terms of family wealth, according to the latest Sunday Times rich list last week-end. India’s Mukesh and Anil Ambani (who?) sit atop an $86bn petrochemicals fortune. Top of Britain’s rich list today is another Indian family - the Mittals, with an estimated £27.7bn fortune from steel. Ten years ago the Sainsbury family topped it with a £3.3bn retailing empire. In a decade or so no doubt we’ll gawping at the world’s first trillionaire. Or maybe less given the accelerated rate at which petrodollar wealth is being amassed.

And petrodollar wealth is showing up in state managed wealth too. The world’s Sovereign Wealth funds – in good part recycled petrodollars - could exceed the US economy (est. $13.8trn) in seven years time reports the Guardian. In 2007, their collective value rose 24% to $3.5trn from an estimated $0.5trn in 1990, according to the IMF. In fact, they have been growing at 24% a year for the past three years. Says Jan Randolph, head of sovereign risk at Global Insight:

“Armed with such large amounts of debt-free cash, sovereign wealth funds are the new financial power brokers, replacing the combined financial muscle of hedge funds and private equity, and usurping central banks as the international capital providers of last resort.”

So move aside Bernanke, Trichet, King and co and here comes the new muscle with a bulging wallet.

More than 20 countries have established SWFs says the International Monetary Fund, but they sound relaxed about their growth. In the greater scheme of things, $3.5trn isn’t such a huge sum when set against the estimated value of US securities at $50trn, or the global value of traded securities at $165trn.

Regards,

Rob Mackrill
The Daily Reckoning