Sovereign Wealth Funds: How to Turn Sovereign Wealth Into Personal Wealth

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

Sovereign Wealth Funds: How to Turn Sovereign Wealth Into Personal Wealth

by Alexander Green, Chairman, Investment U

Investment Director, The Oxford Club

Monday, June 02, 2008: Issue #802

We all know the U.S. government is in debt up to its eyeballs. Moody's is already threatening to downgrade the country's debt rating due to unfunded liabilities for Medicare and Social Security.

But our other big national deficit is creating a different problem, as well as the potential for one low-risk, high-return investment opportunity - Sovereign Wealth Funds. Here's the bottom line...

Because the United States has run such a large and persistent trade deficit for so many years, other countries - like China - have been able to run up large current account surpluses. These surpluses, in turn, have enabled them to accumulate substantial foreign exchange reserves.

For years, this money was invested in the world's safest securities: U.S. Treasuries. But the returns from these securities haven't been so hot lately. Especially when you're a foreign investor watching the greenback wilt like last week's roses.

Many world governments are now putting their money to work elsewhere. (Can you blame them?) Sovereign Wealth Funds are their vehicle...

Sovereign Wealth Funds - Financial Assets of a Country

Sovereign Wealth Funds are the financial assets of a country - usually part of the national savings - that are owned and organized into a state-controlled fund. These funds are increasingly moving money into global equity markets. And the sums involved are fairly staggering.

  • Current assets controlled by Sovereign Wealth Funds are estimated to be $3 trillion.
  • They are expected to reach at least three times this amount over the next five years.

This is a bit scary to some investors, because these funds are entirely secretive. There is no world body to which they have to disclose what they are buying or when.

But here's a common sense insight. They aren't buying small or mid-cap companies. There isn't enough liquidity in these to allow them to enter or exit their positions efficiently.

No, these funds must invest in the world's biggest companies. As an individual investor, you might benefit from picking up giant companies like General Electric or British Petroleum or HSBC.

Buying Sovereign Wealth Funds The Easy Way

Or you can buy Sovereign Wealth Funds the easy way, by plunking for a few shares of the Dow Jones Global Titans Fund (AMEX: DGT).

This exchange-traded fund (ETF) holds 30 of the world's largest publicly traded companies. It also pays a 2.5% dividend, 25% more than the average money market is paying right now.

Its major holdings include the companies I mentioned above, plus other market bellwethers like:

  • AT&T
  • Johnson & Johnson
  • Nestle
  • Microsoft
  • Proctor & Gamble

The Many Advantages of The Global Titans Fund

The Global Titans Fund has several advantages...

  • It is well diversified, liquid, and gives you instant foreign currency diversification. (60% of the holdings are in the United States, the rest are in international markets.)
  • It also uses a passive indexing approach, so it is both cost-effective and highly tax-efficient.
  • Annual expenses are only one half of one percent.

In sum, the Dow Jones Global Titans Fund is holding exactly the mega-cap global companies that Sovereign Wealth Funds are likely to plow money into for many years to come.

My suggestion? Pick up a few shares now. And let the world's most powerful creditors push your shares higher in the weeks and months ahead.

Good investing,


Editor's Note: Alexander Green's recommendations have beaten the Wilshire 5000 Total Market Index by more than 3 to 1 over the past five years. To get access to a steady stream of the companies he expects to outperform this year, consider joining The Oxford Club, our premium service. You'll get immediate access to all of Alex's growth-stock recommendations when you become a member for less than a game of golf! Learn more.

Today's Investment U Crib Sheet - Sovereign Wealth Funds Aren't New...

  • Sovereign Wealth Funds aren't new, and there's no indication that their growth will slow.According to U.S. Treasury Secretary Paulson, "As we seek to open new markets abroad, America will keep our markets open at home to investment from private firms and from Sovereign Wealth Funds. We reject measures that would isolate us from the world economy."

Top 10 Sovereign Wealth Funds

  • Some of the older Sovereign Wealth Funds (SWFs) have been around since the seventies; their investment practices and complete holdings are still a mystery to many. Their secrecy doesn't change the fact that they are driven by the same investment requirements as everyone else. They have the same needs for safety of principal, and capital appreciation.
  • Sovereign Wealth Funds are under the same pressure that a large mutual fund or pension is. They can lose money and have negative performance like any actively managed account. They are striving for above-average returns - something most mutual funds would tell you isn't the easiest thing to achieve. Eighty percent of all actively managed funds under-perform the market.
  • The $3 trillion Sovereign Wealth Funds have under management is still small when you consider pension funds manage $21 trillion and mutual funds have another $18 trillion.Yet their growing influence and their influx of new capital to our markets will bode well for investors in large-cap stocks. Here are three other index funds that invest in large-cap equities that should benefit from investment by Sovereign Wealth Funds...

    SPDR DJ Wilshire Large Cap Value ETF (AMEX: ELV)

    Vanguard Mega Cap 300 Value ETF (NYSE: MGV)

    ProShares Ultra QQQ (AMEX: QLD)

  • For more investable ideas, here are four more ETFs that Alex Green recommends, in Investment U Issue #779, Exchange Traded Funds: 4 Ideas For Income Investors.

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