OSLO/LONDON The glory days of some oil-based sovereign wealth funds could be behind them now that cash-strapped governments are raiding the coffers to plug yawning budget gaps, with investment returns too weak to make up the shortfall.
This is forcing some funds to sell assets to find ready cash, raising concerns that if this process accelerates, it could drive down the price of equities and other assets - creating a vicious circle.
Over the past two decades, sovereign wealth fund (SWF) assets have grown to as much as $7 trillion, according to Morgan Stanley, including everything from direct stakes in companies to luxury property assets.
But those funds that rely on their governments' oil export revenues for their main source of new money - such as in Saudi Arabia, Russia or Norway - now face a double whammy.
Brent crude prices have sunk by about 68 percent since June 2014 to below $40 a barrel, slashing oil income. At the same time, slower economic growth and losses of up to around 19 percent in asset classes such as emerging equities this year mean some funds cannot generate a high enough return to counter the oil price decline.
"If you can generate in excess of 6 percent as a SWF you are doing well," said one asset manager, who declined to be named. Even Singapore's GIC fund, which is not reliant on commodity revenues, expects lower investment returns over the next five to 10 years.
In the first three quarters of 2015 SWFs pulled $27 billion of their cash from asset managers, according to data from eVestment, with about $19.5 billion redeemed in the third quarter alone.
Sven Behrendt, managing director of GeoEconomica, a Geneva-based political risk consultancy, said the current low oil price environment was the first test for those funds set up to provide an alternative income stream to oil revenues - but it had come too soon.
A SWF survey conducted by asset manager Invesco earlier this year found that more than 70 percent of respondents expected government funding to fall in future.
The biggest oil producers, such as Saudi Arabia and Russia, have already begun tapping their reserves, with net foreign assets at the Saudi Arabian Monetary Agency (SAMA) shrinking to their lowest level since late 2012 in October.
"It is something that keeps me awake at night, from a security perspective," said Sony Kapoor, head of the Re-Define think-tank and a senior visiting fellow at the London School of Economics, who wrote a 2013 study on the Norwegian wealth fund.
The International Monetary Fund has warned that Saudi Arabia will exhaust its financial reserves in under five years if it does not rein in public spending.
Kapoor cited Saudi Arabia as the most concerning example as its oil revenues fund social benefits for its population.
In Russia, the Reserve Fund - which acts as a "rainy day" fund - is expected to shrink to 3.4 trillion roubles by the start of 2016, and the government has warned it may have to dip into its National Wealth Fund in 2017 if the budget deficit is not cut.
Even Norway - which has the world's largest SWF, worth $835 billion - next year expects to make its first net withdrawal since the wealth fund was set up almost two decades ago. The fund alone holds an average of about 1.3 percent of all global stocks and 2.4 percent of European firms.
"It doesn't make sense to bite into the capital of a fund for stabilisation purposes – you should just withdraw monies equivalent to the investment return," said Behrendt, speaking about SWFs in general.
"The moment you are biting into the capital, you are challenging the very purpose of long-term savings funds."
Some asset managers have already detected subtle shifts in SWF investment behaviour, pointing to less competition for expensive "trophy assets" such as prime commercial real estate.
"As the asset growth has slowed, there is less activity in terms of buying some of the more illiquid assets," Patrick Thomson, head of international institutional clients at JP Morgan Asset Management, said.
More long-term changes are also expected. For instance, Norway's wealth fund says it will take longer to reduce its exposure to Europe, a long-term target.
"We have steadily decreased our overweight to Europe by using the inflow to the fund in buying other regions," said Ole Christian Bech-Moen, chief investment officer for allocation strategies. "If the inflow is lowered then that transition path may need to be revised," he told Reuters, declining to be specific on the timeframe.
Not all funds will suffer big outflows - around 40 percent of SWF assets are not driven by commodity revenues, according to JPMorgan Asset Management, so should be less affected.
The smaller populations of some Gulf states, and their relatively low oil price breakeven levels, should also give some governments room to manoeuvre. For example, Oman and Abu Dhabi can make cuts to infrastructure spending relatively easily.
But even the big Asian funds, which are not funded by oil revenues, have to contend with a much stronger dollar. As a result, China's foreign exchange reserves have fallen to their lowest level since February 2013.
(Additional reporting by Saeed Azhar in Singapore; Editing by Pravin Char)