QIA: A Taste for Commodities

In the last month, even as markets have sold off on worsening macro news, many SWF watchers in the press remain  agog over the recent flurry of purchases by the Qatar Investment Authority across the commodities space, particularly the energy sector, as well as some other extensive purchases.  It seems a good time (if a belated one) to put some of these investments in context. Following on from investments in Exstrata since the beginning of the year, reports suggest that they have invested in Shell as well as Total among other direct investment.

As is usual in this opaque area, we are seeing only part of the ongoing trends and largely the backward looking ones. Rather than necessarily being a massive portfolio shift away from property and finance (previously the primary area of noticeable purchases) these energy buys seem to be part of the allocation of Qatar’s increased capital (we figure statements in the press about US$30 billion in new capital this year sound about right and would take assets under management to over US$120 billion).

With its hefty gas revenues, Qatar has a larger per capita and per GDP surplus than many other countries. This leaves it with more flexibility to spend the money, even after subtracting away increased spending and demands for local investment (including property). Thus Qatar, more than some other funds, still has the space to keep spending and is spending a smaller share of its increased revenues at home. This also leaves it feeling comfortable investing more in less liquid assets  – this compares to Saudi Arabia which continues to rack up tens of billions of dollars a month in mostly liquid assets. Saudi might well have to draw on more of those assets.

A few themes seem to be dominating Qatars portfolio.

Investment in sectors and companies best geared for EM demand growth, particularly consumption growth. This includes companies ranging from Vivendi to infrastructure companies.

Interest in European domiciled and listed companies to exercise these bets. Since mid 2011, most of the purchases have been in Europe, with fewer buys in the U.S.. This reflects in our view a desire to get the benefits of stronger reporting and governance structures in Europe for companies that derive their returns from emerging markets.

More focus on real assets and companies that control them. Qatar, like many other GCC funds have long been interested in commodities as part of their asset allocation, investing even in energy despite the fact that this doubles down on their reliance on energy as both investment income and hydrocarbon revenues come from a similar source. In addition to metals and energy, Qatar continues to invest in food and agricultural land (another story geared to EM demand!)

Modest rebalancing away from property. Some of these investments may have the net result of reducing what seemed like an overweight to property. While QIA is still investing in property and arguably investing more heavily in property at home to avoid a crash given the oversupply. Abroad it may be reducing the share of property.

Investing more in-house. Some of these shifts may reflect a change in management as some long time leaders have left and new managers may be trying to put a stamp on investments. Qatar still invests heavily through a series of intermediaries, but it has brought more in house or at least has staffed up to do more strategic investment in ways that are noticeable. This is consistent with trends in other areas.

Qatar may be shying away from investments that formally have a technology transfer or coinvestment approach such as those engineered with Daimler and other manufacturing companies. While the country may still hope for such partnerships, these are more time consuming to implement and the payoff may be uncertain or far in the future. Investment in these resource companies, may still come with some of these goals in mind.

Ultimately, it seems fair to see these in the broader context of the country’s balance sheet, and not necessarily to extrapolate Qatar’s past investments to other funds. Across the oil fund world, new capital likely already peaked on a quarterly basis in Q1 – going forward, inflows are likely to be weaker.