Anybody who thought that sovereign funds are on their way out may be in for a surprise.

An analysis of foreign portfolio investor (FPI) data by investor category shows that their holdings in Indian debt and equity securities has hit a new high. These funds from oil-rich countries were expected to be sellers in Indian markets because of the correction in crude and the resultant stress back home.

They now account for over a tenth of all FPI holdings. This is the first time that it has crossed the 10% mark since depositories began to make available separate data on the type of foreign investors in 2012.

Their holdings in equity and debt are also at the highest level since records are available. Sovereign wealth funds (SWFs) held 2.18 trillion in equities and 330.16 billion worth of Indian debt in May. Sovereign funds’ equity holdings are 10.88% of overall FPI equity holdings, and debt holdings are 9.71% of overall FPI debt holdings. They account for 10.71% of overall FPI assets under custody. All three figures are the highest on record.

A sovereign wealth fund is an entity which invests the capital of a country to generate returns which can meet long-term needs. For example, the Abu Dhabi Investment Authority invests the money that the country makes from oil. Some of the largest sovereign funds in the world are run by oil-rich countries. It was expected that a crash in oil prices would result in these entities withdrawing capital from countries including India. The money would be required to meet financial requirements in their home countries because they are not making as much money from selling oil.

These fears don’t seem to have come true for India.

A list of entities from the Sovereign Wealth Fund Institute, which tracks the segment, was compared to Capitaline shareholding data. The shareholding data provides disclosures for entities which hold more than 1% stake in a company. While this means that the list is not exhaustive, it provides a sense of the size of holdings.

The three biggest oil-driven SWFs which show up include the Abu Dhabi Investment Authority, the Kuwait Investment Authority and Norway’s Government Pension Fund – Global. Holdings for two out of the three have hit highs. Also, the general trend has been upward as the chart below shows.

The rise could be because of multiple reasons. One is reallocation.

Foreign media have reported that sovereign wealth funds are exiting passively managed strategies and managing more of their funds internally. This could partly be because money which was already invested in India through a third-party fund is now showing up under the sovereign wealth fund’s own name.

This is also borne out by market experts who have alluded to selling in the passively managed category, though there is no way to quantify this in terms of how much is from sovereign wealth funds.

A Kotak Institutional Equities ‘Foreign fund-flow tracker’ report, which looked at foreign fund flows during the month of May, noted $0.46 billion ( 30.79 billion at May’s average exchange rate of 66.93) worth of outflows from funds it tracked, while noting that these were largely from passively managed funds.

“Most of the listed fund redemptions could be attributed to ETFs (exchange-traded funds)," said the 7 June report, authored by analyst Saifullah Rais. An ETF seeks to generate the same return as the index it tracks. An active fund has a fund manager who looks to select stocks which will outperform the market.

Another reason could be a talked-about shift in investments towards emerging markets. India could have been helped in this by the government’s wooing of sovereign wealth funds including in the Middle East. Finance minister Arun Jaitley met with sovereign wealth funds during the Indian investment summit in February. And there was already some momentum towards India with funds such as the one from Norway having announced its intention to increase India allocations as early as 2014.

Whatever the reason, SWFs added 409.51 billion in assets under custody in May, according to depository data. They also sharply increased their debt investments in the same month by almost 250 billion. The total amount of 657.12 billion for the month is the highest on record for these funds.

This rise in holdings comes even as there has been a general recognition of the strain that oil exporters are under. The gulf countries had a budget surplus of $600 billion earlier over the last five years. This is expected to change to a budget deficit of $700 billion over the next five years.

The sustainability of the current trend will have to be closely watched.

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