Courting The Sovereign Funds: $8 Billion In Fees

No one knows for certain how much money is in the big sovereign funds controlled by governments from Beijing to Kuwait. Most estimates are $2 trillion to $3 trillion. With oil money flowing into some of these countries and a tremendous balance of trade in China’s favor, the numbers are certain to rise.

Someone has to manage all of that money, and it will not all be done by the funds themselves. They will turn to money managers in Europe and the US, managers with decades of experience running large pools of capital. The Wall Street Journal reports that Merrill Lynch (MER) "estimates a potential shift of $1.5 trillion to $3 trillion of assets into the global asset-management industry in coming years, generating $4 billion to $8 billion annually in extra fees." For US investment operations like Alliance Bernstein (NYSE:AB) and State Street (STT) those fees could add a great deal to earnings.

Getting the money to manage may not be the difficult part. Investing it and keeping the sovereign funds happy may be very hard.

The US government in the form of Congress and financial regulators has voiced concerns about big overseas investors putting money into "strategic" American assets. That may include US banks and companies in some industries like high technology. Those constraints could make it harder to put capital to work.

The other issue, which takes money managers into uncharted waters, is what happens if a firm makes a series of bad investments for a sovereign fund and loses a lot of its capital? Would a foreign government take legal action against a US-based firm? With so much money at stake things could get dicey.

Running large pools of foreign capital may have certain attractions, but they could disappear fairly fast.

Douglas A. McIntyre