Sovereign funds look past brief turbulence

Published Mar 28, 2014

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London - Sovereign wealth funds see emerging market turbulence as a long-term buying opportunity, but are wary of excessive exposure through some of their Western holdings, such as luxury goods makers, according to a top investment official at Franklin Templeton.

David Smart, who heads a team managing assets for sovereign funds and supranational clients at Franklin Templeton, said the $5 trillion (R53.6 trillion) sector could afford to ride out volatile swings thanks to its long-term horizons.

“In terms of our client base, we haven’t seen any evidence of de-risking. If anything, we’ve seen willingness to take advantage of opportunities. They have the ability to withstand volatility,” Smart said on Tuesday. “They see it as a long-term acquisition opportunity.”

But the funds, which manage windfall resource revenues for future generations, are shifting their approach to emerging markets from treating them as a homogenous group.

They are now reframing allocation with a focus on how much of their holdings are truly exposed to the emerging world in underlying economic, not just geographic, terms.

One way to do so, Smart said, was to use measures such as index provider MSCI’s economic exposure index.

The index provides a gauge of a firm’s economic exposure using the geographic distribution of its revenues.

For example, having many European companies that sell a lot of products in emerging economies would push up a fund’s economic exposure.

Makers of luxury goods, cars and drugs derived a big portion of revenues in developing countries, he said. – Reuters

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