Top 10 Largest Sovereign Wealth Funds in the World

Sovereign Wealth Funds (SWF) are state sponsored funds invested in various financial assets in markets around the world.  The SWFs are usually financed and supported by country’s Foreign Exchange Reserve, the monetary surplus in foreign currency that the state has accumulated in the international markets through exports and inflow investments, subtracting its imports and outflow investments.  However, the SWFs are usually managed separately from nation’s official foreign currency reserves.  The goals of the SWF obviously are to preserve nation’s wealth savings and to grow the assets of funds overtime.  Due to the nature of extremely low risk required by the governments, SWFs generally do not pursue the highest investment profits instead focusing on the safest and the most stable returns.

There are two types of Sovereign Wealth Funds, depending on the sources of the finances, i.e., commodity or non-commodity incomes.  Countries with large nature resources and energy exports usually establish commodity based SWFs.  In fact, the first sovereign wealth fund was started in Kuwait, 1953, in order to reinvest its excessive oil commodity revenues.  As a result, it is no surprising to see the top 10 largest commodity SWFs are all from oil and gas nature resource rich countries.  Abu Dhabi Investment Authority is the largest fund with total assets reaching $627 billion, followed by Norway Government Pension Global Fund with assets of $512 billion.  Russia’s National Welfare Fund is relatively new but has moved up quickly with assets of $143 billion.  It is also worth noting that the Alaska State of US has a sizable $36 billion SWF ranked No. 10 in the top list.  Other countries with top SWFs include Kuwait, Qatar, Libya, Algeria, and Kazakhstan.

Commodity SWFs have seen rapid growth as oil and gas prices increased from 2000 to 2008.  At the end of 2007, commodity SWFs had totaled more than $2 trillion.  When the price of the commodities rises, nations exporting these nature resources will see increased export surplus.  However, high commodity prices can also significantly slow down or even crash the world economy.  In July 2008, when the crude oil peaked at $147.27 per barrel, it created a world-wide inflation panic shock and triggered the worst financial disaster from US, Europe to the entire global.  When the world economy was in recession, the SWF investment portfolios could not escape the hardest hit and experienced significant drop of their asset values.  As a result, the SWFs have become a strong driving force to counter the rise of the commodity prices.  Nature resource rich countries now must find a sweet balance between the commodity exporting surplus and the SWFs investment health returns.

The made-for-export model based on low cost labor human resource have created economic boom for East Asian countries that started in Japan from 1960s and gradually spreading to the four little tigers, Singapore, Hong Kong, Taiwan, South Korea, between 1970s to 1990s.  The abundant low cost labors and their hard working have brought in tremendous trading surplus and wealth saving to the region.  These countries have established SWFs based on the non-commodity human resource trade incomes.  This trend has reached its climax with 30 years of opening and unprecedented explosive economic growth in China.

Today, China is the largest country with the most international trades.  The top 10 largest non-commodity SWFs are no exceptionally dominated by funds from China.  State Administration of Foreign Exchange (SAFE) Investment is the largest SWF with a total asset of $347 billion, followed by China Investment Corporation’s $332 billion.  Hong Kong Monetary Authority Investment and China National Social Security Fund are No. 4 and No. 5 respectively with assets $228 and $147 billion.  Singapore was among the first nations to establish the non-commodity SWFs and it has two SWFs in the top 10 list.  Government of Singapore Investment Corporation is No. 3 with an asset of $248 billion and Temasek of Holdings of Singapore is No. 6 with an asset of $133 billion.  Other top 10 SWFs include Australian Future Fund, No. 7, Ireland National Pensions Reserve, No. 8, Korea Investment Corporation, No. 9, and France Strategic Investment, No. 10.  It is equally amazing to mention that there was not a single Chinese SWF in the top fund list as soon as five years ago.  Non Commodity SWFs totaled $1.2 trillion at the end of 2007 and are expected to reach 50% of total SWFs by 2015. 

The size and the strength of the SWFs are determined by the size of nation’s Foreign Exchange Reserves and the power of the country.  China today has a huge Foreign Exchange Reserve of more than $2.6 trillion, which is larger than the combining total FERs from the next six largest countries.  More importantly, the size of China’s FER is still growing rapidly with addition of $10-20 billions almost every month. 

Although the Chinese SWFs are topping the world largest funds, however, SWFs are still a small portion of China’s huge Foreign Exchange Reserves for around 30%.  Once the performance of these SWFs have demonstrated that they can be a capable and an effective investment platform to preserve and grow the reserve wealth, more shares of total FER will certainly be allocated into these SWFs.  Initial investment of $8 billion from China Investment Corporation into US stock equities Blackstone and Morgan Stanley in 2007, which turned sour almost from day one, has lost more than half of its original value by today.  That was alarming but certainly a necessary tuition for the new Chinese SWFs to pay in order to learn the valuable lessons from actual investment experience.  The fund has quickly learned their lessons and modified their investment strategies ever since.  In 2009, China Investment Corporation has produced a healthy 12.9% of total asset return, gaining an incredible $42 billion in one year!

Chinese SWF Investment Loss in US Stocks

Bank	Target Bank	Year	Stake	Invest, $M	Worth Now, $M	Profit (Loss), $M
China Investment	Morgan Stanley	2007	9.9%	5,000	3,465	(1,535)
China Investment	Blackstone	2007	9.4%	3,000	457	(2,543)

The ultimate goal of the SWFs is to add an organically growing wealth reserve into nation’s nature or human resource exporting incomes.  No country has unlimited nature resources.  At the current burning rate, all known fossil fuel reserves for oil and gas on earth will be completely consumed in about 50 years.  The energy resource rich countries with SWFs today must grow their wealth funds quick and big enough to prepare for the inevitable loss of future nature resource exporting income, in order to maintain their growing life style for the new generations. 

This is a tough task. 

For many nations, however, there are no other alternatives.

Top 10 Largest Banks in the World

It is not surprising that top ten largest banks in the world by market value in October 2010 are dominated by the “big-four” banks from China.  Industrial and Commercial Bank of China (ICBC) remains the largest with a market value of $240 billion dollars, closely followed by China Construction Bank (CCB).  Bank of China (BOC) is No. 6, surpassed by Agriculture Bank of China (ABC).  ABC went public in July 2010 with the world’s largest IPO of $23.1 billion at both Shanghai Stock Exchange and Hong Kong Stock Exchange, breaking the previous IPO record set by ICBC in 2006.  Compared to the top 10 list of 2008, the positions of these large Chinese banks have changed little.  Hong Kong and Shanghai Banking Corporation (HSBC) maintained its No. 3 position through extensive worldwide banking.  From its name, one can hardly imagine that HSBC is actually a British bank.  As a matter of fact, HSBC is seriously considering to move its headquarter from London to Hong Kong to avoid the hostile business environment toward financials and banks in Europe.

What is surprising is that, after the worst hit from the mortgage crisis and severe depression from hostile regulations and politicians, there are still 4 major US banks staying on the top 10, JP Morgan Chase, Wells Fargo, Citibank, and Bank of America, primarily through blood merger and government bailouts.  Wells Fargo moves up its ranking from rising in market value.  On the down side, Bank of America (BAC) has dropped like a falling rock as a result of sharp decline in its share price.  BAC was No.2 in 2008 but slides to No. 9 in 2010, in spite of major acquisitions including the largest home loan lender Countrywide Financial and top investment bank Merrill Lynch.

Five to ten years ago, the top 10 banks list looked completely different, see the 2006 and 1999 lists below.  All the top banks were from US, Europe and Japan.  Citibank was No. 1, Bank of America was No. 2, and HSBC was No. 3.  No one heard of ICBC, CCB, or even Bank of China outside of China.  Yes, these banks were controlled by state and were not publicly traded.  However, the primary reason that these Chinese banks were not on the top list was they had been in deep trouble.

Back in 2005, state controlled big Chinese banks were facing serious bad loan crisis.  Just “big four” banks alone were holding $125 billions of bad loans, or 10% of their total loans.  Nonperforming loans might make up 50% of all loans and eat up to 15-30% of entire Chinese GDP.  Many feared the true figures could be much higher and the entire banking system would eventually collapse, crushing the fast growing Chinese economy. 

Hi, Americans, do these sound familiar?

Facing the enormous pressure, China had no choice but to put critical efforts to clean up these banks.  First, the state poured extra funds into banks.  From 1998 to 2005, $105 billion were injected into the top three banks.  Second, more than $300 billions of bad loans were transferred into asset-management companies, a strategy borrowed directly from the US.  Third, China opened its banks and markets to the top international banks.  Major foreign banks, such as Citibank and HSBC, etc., could directly open branches in big Chinese cities.  In addition, these foreign banks were also invited to invest and take major stakes in the state owned banks.  By doing this, Chinese banks could get badly needed cashes immediately, and more importantly, they could establish a sound banking and financial system in China by following the good business model run in these top international banks.  These drastic reforms and strict disciplines, along with the international managing guidelines, have quickly turned around the Chinese banking system.  By 2007, bad loans had been sharply dropped to less than 3% of total bank loans.

Obviously, the rapid recovery of these Chinese banks and the fast growth of the banking business have made the initial investments of the international banks grow significantly, returning hefty profits for the US banks in difficult situation today.  In fact, BOA, Goldman Sachs and Morgan Stanley all had to unwillingly sell their stake holdings in the big Chinese banks, raising life saving cashes to repay the US TARP.  It was a painful decision for the US banks since for sure these shares will be worth a lot more in the years to come. 

Investment Profits or Losses between US and Chinese Banks

Bank	Target Bank	Year	Stake	Invest, $M	Worth Now, $M	Profit (Loss), $M
Citibank	SPD Bank	2008	2.7%	73	840	767
Goldman Sachs	ICBC	2006	4.9%	2,600	11,760	9,160
America Express	ICBC	2006	0.4%	200	960	760
Bank of America	China Construction Bank	2005	8.5%	2,500	18,744	16,244
		2008	10.6%	7,000	23,386	16,386
Morgan Stanley	C International Capital	1995	34.3%	35	1,000	965
China Investment	Morgan Stanley	2007	9.9%	5,000	3,465	(1,535)
China Investment	Blackstone	2007	9.4%	3,000	457	(2,543)

Now, the table has turned around.  It is the US banks and economy that are in deep water today, a similar crisis situation that China had five to ten years ago.  Can US banks and politicians open their minds, putting the business and US economy above all the bias and politics, to learn from the Chinese successful banking experience?  A good way is to invite the Chinese and other foreign banks to invest and to take major stakes in the troubled banks.  US Treasury is still holding 3.6 billion shares of Citibank common stocks today.  It can arrange a direct sale of this sizable holding to big Chinese banks.  BOA should also sell 10-20% of its stake to dramatically enhance bank's financial strength.  Most importantly, the banks, politicians and all the Americans must change their biased view and should have a positive attitude to let the Chinese and other foreign investments to profit over times. 

Looking at the table above, American banks have made the record profits from their Chinese banking investments.  Americans love these American Yuans.  Actually, Chinese government is pleased to see US banks are profiting from the American Yuans, so that more investments will come.  Chinese banks are also grateful to the great expertise learned from top international banking.  Moreover, the Chinese people are nowhere against the US banks since the booming Chinese banks have fueled to the rocket growth of the entire economy.  It is a textbook case for a great win-win situation.  However, this is in sharp contrast to the Chinese investment loss in American banks and financials, such as China Investment’s major stakes in Blackstone and Morgan Stanley, which had turned sour almost from day one.

Nevertheless, making money for everyone is not a guarantee in almost anywhere, including China and US.  Government, banks, politicians and the people all have to work hard together in order to reach a win-win strike.  If banks suffer, the entire economy will be depressed.  For the sake of US economy, government, banks, Republicans and Democrats alike should open and welcome the Chinese Dollars to invest in the troubled US banks, pushing for another round of win-win situation.

When US banks thrive, all Americans will benefit!

Miserable Banks Everyone Loves to Hate

American banks were at the heart of causing the worst financial crisis that brought down the entire world economy because of reckless subprime mortgage over-lending.  Everyone on earth knows that. 

Banks, however, were not the sole “criminal” for this disaster that has ruined so many lives.  The entire home purchase-lending chain, including politicians, law makers, regulators, banks, investors, realtors, housing industries, and the home buyers, etc., shall all bear the blames, if not equally.  Most people on earth should also know that. 

In the hi-days of real estate boom, greedy investors made huge money by selling mortgage backed securities.  Big banks grew bigger through no restricted lending.  Politicians and government regulators played more golf with more lobby sponsoring.  More people flocked to be the realtors to raise the employment.  And the poor buyers got their dream houses that they could never afford with their regular incomes.  The entire US economy was high flying and everyone was happy!

The burst of subprime mortgage triggered the deep financial crisis and plunged the US economy.  The banks were hardest hit financially since they are the ones that ultimately hold the bad loans.  Lehman Brothers, Washington Mutual went to the unthinkable bankruptcy.  For many others, merger and government bailouts were the only options to survive.  Billions and billions of money vaporized for banks and investors. 

Banks and Investors Lost Billions in the Worst Financial Crisis

Bank	Peak Price before Crisis	Bottom Price in Crisis	Market Valuation Loss, $ b
Citibank	52.5	1.03	257
Bank of America	51.2	3.14	213
JP Morgan	48.2	15.93	132
Wells Fargo	39.8	8.61	119
Wa. Mutual	45	0.16	39
Goldman Sachs	235.92	53.31	83
Lehman Brothers	74	0.1	43
Morgan Stanley	88.48	9.68	83

However, banks were unfairly getting most of the blames, including all the guilty ones from the entire home purchase-lending chain.  Home owners hated banks to take away their life worked dream.  Realtors blamed banks for the jobs lost.  Politicians attacked the banks to diffuse people’s anger.

Easy Blaming Cash from Bank’s ATM

Obama won the 08 Election by redirecting voter’s attention from Iraqi War to the poor US economy.  The Obama supporters and Democrat party backers then helped to worsen the economy and to plunge the stock market, leading to a classic panic victory for Obama from a disaster.  It was the financial crisis that helped Obama and Democrats to win the White House and both Houses.

Once in power, Obama and the Democrats continuously withdraw the easy blaming cashes from bank’s ATM.  Obama constantly condemned banks in order to maintain his popularity among anger-growing voters.  The Democrats in House and Senate pressed vigorously to pass the notorious financial bill that will severally limit the banking business and weaken their overall financial strength through big government regulations.  If that is not enough, Obama dictated Elizabeth Warren, who hates banks in all her life, to lead the new consumer protection agency created from the financial bill.

Moreover, the US Treasure has kept a significant holding in Citibank’s common shares and has been selling these shares in the open market very slowly for a long period of time.  By doing this, the Obama administration can firmly control the depression of banks and financials, making the bank hatred into real bleeding.

These depressive actions from politicians and regulators have attracted big hedge funds to short the bank stocks repeatedly.  In most cases, one has to suspect that the Democrats and Obama government officials must have worked together with the hedge funds to collaborate the shorting sales.  Whenever there was encouraging development from the banking industry, the Obama government and Democrat congresses would find or create something bad for them, bonus “scandal”, Goldman Sachs subpoena, financial regulation legislation, and the most recent foreclosure paperwork flaws, just name a few.  Almost every bad exposure has been perfectly timed to bring down the banks and financials.  It is no surprise to dig down and find out some close connections between the Democrats and the big hedge funds, and their giant financial gains from deliberately depressing banks.

Poor miserable banks, they lost billions of money, went bankruptcy, surrounding by the harsh blames and depressions, but they dare not to blame anyone else.

Over the two years after the worst of financial crisis, the banks again and again were the easy targets for blames and punishments.  They all have to operate nervously under intensive stresses in order to survive.  When the banks are nervous and depressed, the entire US economies are nervous and depressed.  No wonder there is no quick recovery for the US economy.  No wonder the home owners still cannot find jobs.  No wonder, at the dawn of mid-term election, voters are very unhappy.

Desperate Wishful Thinking

The conservative Republicans running for elections have no guts to stand on truth for the banks.  Instead, they joined the crowds and also blamed the banking bailouts; just trying to redirect voter’s anger.  They might have been in a less extent to exploit the benefits of blaming banks, but surely they are at no position to protect banks and financials, which have been at the heart of economic growth for US and the world.

Ironically, banks and financial industries are also no hurry to turn around their miserable situations right now.  They have been depressed so hard for so long that finally they may have their chance of revenge.  They certainly hope that a great number of Democrats will be defeated in this mid-term election in both House and Senate, changing the dominating political discrimination against banks and financials.  Banks are no hurry to accelerate lending to fuel the US economy quick expansion.  They are no hurry to push the banking stocks higher.  Nevertheless, the depressed stock prices are such a rare opportunity for the bank executives and employees to get large and cheap stock options.  The banking and financial industry as a whole want to prolong the continuous bad condition to fuel voter’s anger.

Making Money Quietly

In reality, how are banks doing these days?  Actually, they are doing surprisingly well, but they have been trying very hard to keep this quiet.  Banks issued new stock offerings to repay the government bailout TARP and to enhance their cash reserves.  They have quietly restructured and written off the bad loans and bad assets.  In the current dollar devaluation chaos time, banks are holding a lot of real estate assets.  They have expanded aggressively in the emerging markets.  Banks have been making money quarter after quarter, but in the same time, they are also lowering everyone’s expectations using various excuses created by the depressing actions imposed by the politicians and government regulators.

As a result, banks are deeply undervalued now than ever.  Bank’s PE/PS ratios have reached historic lows.  Bank’s current stock prices are way below their 1-year targets.

Undervalued Banks and Financials

Bank		Current Price	PE	PS	I Yr Range	1 Yr Target
Citibank	C	3.95	NA	2.42	3.11-5.07	5.29
Bank of America	BAC	11.98	NA	1.74	11.74-19.86	19.47
JP Morgan	JPM	37.15	10.95	1.74	35.16-48.20	52.13
Wells Fargo	WFC	23.58	14.23	1.46	23.02-34.25	36.18
Goldman Sachs	GS	150.69	7.6	1.67	129.50-187.65	187.71
Morgan Stanly	MS	25.02	8.4	1.11	22.4-35.78	32.36

Once the mid-term election is over and the dust is settled down, more Democrats will be voted out of the congresses.  The politics in Washington DC will tilt toward favoring business and economy.  Obama government will have no choice but be friendlier to the banking and financial industries.  Treasure’s Citibank share holdings will be sold directly to major investors and sovereign funds immediately.  Company CEOs will be recruited to key posts of Obama administration.  The foreclosure paperwork flaws will be diminished, just like the magical disappearance of BP spilled oils in the Gulf of Mexico.

Oil spill, what oil spill?  Anyone remember?

You will see skyrocketing of bank’s stock prices.