Sovereign funds put cash in financials

Abu Dhabi Investment Authority's $7.5 billion (€10.46 billion) investment in Citigroup is the largest example of an accelerating trend by so-called sovereign wealth funds investing in western financial institutions.

Analysts at Morgan Stanley estimate that these funds have injected more than $37 billion into financial stocks since the beginning of the year - four times the amount they invested in 2006.

Those figures do not include positions taken by Chinese banks, which have spent about $8 billion on minority stakes in other institutions so far this year.

This spending spree is being driven by the rising oil price and growing foreign exchange reserves, which have swelled the coffers of investment funds in the Middle East and China. These funds already control assets worth $2,200 billion, and economists at Standard Chartered estimate this could rise $13,400 billion over the next decade.

Their investments are not limited to banks. In the past few weeks alone, funds based in the Middle East have declared stakes in Sony and US chipmaker AMD.

Although hard data is difficult to find, there is clear evidence that these funds are paying particular attention to financial stocks.

Temasek, the Singaporean group, has devoted almost 40 per cent of its portfolio to the financial sector, including a 17 per cent stake in UK-based emerging markets-focused Standard Chartered.

In the past year, China Investment Corporation has bought 10 per cent of Blackstone, the US private equity group; Dubai International Capital has acquired a stake in Och-Ziff, the hedge fund group; and the Qatar Investment Authority has bought 20 per cent of the London Stock Exchange.

But the Citigroup investment marks a new stage in this development. For the past few years, western investment bankers have been plying sovereign investment funds with ideas about how to deploy their spare cash. Since the credit squeeze, investment banks have identified a new set of institutions in need of capital: themselves.