Governments Get a SWF Financial Kick

Some SWF officials say they are adjusting their investment plans to match a world in which protectionist sentiment is rising. Singapore's Temasek has already said it is becoming more cautious. "In every country, whether it is in Asia or Europe, there is an increasing tide of nationalism," Temasek chairman Suppiah Dhanabalan told Singapore's Straits Times. "We've got to take various factors into account, such as whether the company or the activity is iconic for that country, whether it will arouse all kinds of emotional sentiment."

It isn't just the prospect of riling trade partners that is persuading SWFs to curb high-profile foreign investments. To much fanfare, China's fledgling SWF, China Investment Corp. (CIC), earlier this year invested in the Blackstone Group shortly before the big New York City private-equity firm went public. But Blackstone's share price has sunk 38% below its June 2007 listing price of $31, costing CIC more than $1 billion. That pratfall appears to have prompted CIC to rein in its ambitions. Instead of making splashy investments in the U.S. and Europe, the fund is now looking closer to home. It recently bought into Central Huijin Investment Co., a government agency with stakes in several of China's biggest state-run banks and brokerages, and will reportedly plunk an additional $66 billion into the Agricultural Bank of China. To the extent that CIC looks for investments abroad, its chairman, Lou Jiwei, said in a late-November speech, it will stick to index funds--equities linked to the performance of entire markets, not individual companies.

That's a conservative strategy, considering the bargains that may be available from investing in subprime-stressed financial institutions in the West. After all, Abu Dhabi's SWF will reap an 11% annual yield from its Citigroup stake, nearly double the dividend yield currently available to ordinary shareholders. Having been burned once by Blackstone, the Chinese are now twice shy. But other sovereign wealth funds out there are flush with cash--and fortune favors the bold.n