Crude oil prices may have dropped 60% in the last year and a half, but that doesn’t mean sovereign wealth funds (SWFs) are going broke. That’s the central message from a November 13th report from Morgan Stanley Global Insight, which also points out that only 60% of SWF assets are held by oil producers, and that SWF assets only represent a median of 3.3% of the asset exposure of major European, Australian and U.S. asset managers and U.S. large cap banks
Morgan Stanley analyst Michael J. Cyprys and team say they have heard investor worries that “prolonged low oil prices and expanding fiscal deficits will drive SWF redemptions.” They have reassured these clients because “…our deep dive indicates a modest 2.1% hit to EPS for our combined [asset manager] coverage in the extreme and unlikely bear case of full redemptions.”
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Sovereign wealth funds actually small percent of major asset managers
The MS analysts begin by highlighting that both media reports and some management commentary have suggested that certain “petrodollar-related” sovereign wealth funds have been withdrawing billions of dollars from asset managers because of growing national deficits and to minimize exposure to volatile equity markets given much lower crude oil prices. Cyprys et al. argue that these SWF redemption concerns are really overblown given that only 60% of SWF assets are held by oil-reliant economies, and, moreover, current fiscal pressures vary dramatically.
The report took a closer look at the potential impact of SWF redemptions across their European, Australian, and US asset managers and U.S. large cap banks universe. SWF asset exposure was seen at the level of 0.0-12.5% (median 3.3%).
The team went on to note that “our conversations and experience suggest a meaningful discount on fees for large separate account mandates. Thus, we expect that SWF assets could be delivering around half the institutional fee rate, implying a more modest revenue exposure of 0.0-3.5% (average 0.9%). Extreme bear case suggests potential earnings risk of 0.1-7.1% (avg. 2.1%) if all SWFs redeemed all externally managed assets.”
Cyprys and colleagues go on to argue that the firms who have the most risk vis a vis redemptions from sovereign wealth funds are firms with performance challenges, and they point to Aberdeen, Ashmore, and Franklin Resources in this regard.
The Morgan Stanley team suggests that Alternative managers that mainly manage drawdown funds that lock up capital for a decade with no redemptions face very little risk. That said, they do note that fundraising could slow in the future if SWFs move to to reduce their allocations. The analysts also suggest that retail-focused firms with little SWF exposure such as HGG, JNS, WDR will be minimally impacted even in a worst case scenario. Keep in mind that large financial institutions with asset management divisions such as JPMorgan, and Goldman Sachs are well diversified, so large scale redemptions would not be too painful.
Finally, given that trust banks (BK, NTRS, STT) are primarily offering low fee passive products, this means that AuM skew is on the high end, but the fee rate is probably in the low single digits.
Also of interest, as reported by ValueWalk, a recent report from Moody’s suggests large scale SWF redemptions are not likely given most SWFs have worked to build buffers against oil price shocks.