Fuelled by a desire to keep up with the US and China, traditionally passive sovereign wealth funds are increasingly deploying capital into strategic development areas like infrastructure, communications and more recently the digital economy according to global investment manager and academic Winston Ma.
No longer mere “stabilizers of capital markets”, the sovereign wealth funds of the world – which control around US$30 trillion in funds – are building internal teams and becoming more “active and direct” in their investment style, Ma explained on a recent Investment Magazine Market Narratives podcast.
Part of the reason is to save money, he said, by eschewing external management teams.
A larger purpose, however, is because these funds serve as domestic economic promotion agencies that drive strategic development agendas linked to sectors like infrastructure, telecommunications and increasingly, the digital economy.
“All countries are looking to sovereign funds as a policy tool to promote domestic research and development in order to stay as a relevant information centre besides China and the US,” Ma explained. “For Europe, Japan and places like India they need to think about how they can stay competitive in these digital revolution competitions.”
Many countries and regions are now setting up specific sovereign wealth funds tied to singular strategic objectives, he explained. The EU is looking to set up a €100 billion to finance European tech “champions” competing with alibaba and facebook, for example, while Japan is reported to have set up a 6G research fund, Ma said.
“That’s not a typo,” he added. “They’re already thinking ahead. If they’re late to the 5G competition they want to get ahead on the 6G.”
Ma’s background is astonishingly diverse.
As an undergrad in Shanghai he studied engineering before switching to law for his graduate studies. After becoming a lawyer in China he accepted a scholarship from NYU law school, completed his masters, passed the bar and became a US securities lawyer at Davis Polk & Wardwell’s in New York.
“I then got my MBA degree and transitioned to an investment banker on Wall Street,” he said.
Ma spent most of his time on equity capital markets at JP Morgan before being poached by Barclays in 2007 to start the US equity business for the UK bank in New York.
“Two things happened in 2007,” he recalls. “One, the financial crisis started. Two, CIC – the sovereign wealth fund of China – was established with a fresh $200 billion to invest. So for me it was a very easy choice, at the beginning of 2008 I became the first group of overseas hires by CIC and I moved back to China.”
Ma became an author in 2006 when China launched its QFII (qualified foreign institutional investors) system and he wrote Investing in China: Opportunities in a transforming stock market.
In 2020 he published his fifth book, The Digital War: How China’s tech power shapes the future of AI, blockchain and cyberspace, about China’s move beyond mobile internet into advanced digital technologies like AI and blockchain.
“The Chinese digital economy story is no longer a domestic story,” he said. “It has global implications.”
Digital economy implications
Ma believes sovereign wealth funds will continue to actively invest more in technology, rather than sit on the side lines and watch the tech arms race develop between the US and China.
A lot of this investment, he said, will go towards developing solutions attached to blockchain investments and the digital economy.
“It gives the other countries a sense of urgency in terms of how they can be a part of the future of the digital economy,” he said. “It’s important to achieve that policy agenda.”
Observers will see more and more countries with multiple mandates for their sovereign wealth funds, he said.
“They want to invest wisely to maximise returns, but at the same time they want to achieve strategic development goals from the investments.”
These multiple mandates cross over with ESG targets, he explained, with the Irish being a recent example of a sovereign wealth fund with “double bottom lines” for their investment objectives.
“They look for the returns, but at the same time they look at the social economic impacts of these investments,” he said. “Going forward these multiple objectives will be very common across all sovereign funds.
While the idea of sovereign wealth funds aligning with ESG goals gets a lot of mainstream attention, and infrastructure and communication mandates isn’t far behind, the notion of these funds allocating vast tranches of capital to tech development is only starting to come to light.
For the tech sector itself, and especially the digital economy, that could have huge implications.
“Given the digital economy is so young and a lot of the governance issues are still being defined these sovereign funds can play a really role in defining the future digital economy,” he said.