Throughout time nations have always been keen on getting a bit bigger or a bit richer, through fair means or foul. The Romans built an empire based on an army that followed orders; centuries later the Germans used the same model but replaced tortoises and catapults with panzers and stukas. The British, Dutch and Spanish were subtler in the 1700-1800s using more politically correct ‘explorers’ and pilgrims, then sending out armies to protect their interests.

More recently the Germans wised up and figured that they could conquer Europe with a phoney Treaty and the compliance of bumbling idiots in high places. But the group that win the ‘More cunning than a fox with a degree in cunningness (careful with the spelling there)’ award are the Sovereign Wealth Funds (SWF).

These funds are becoming more prominent than Kelly Brook’s chest, and a greater threat to the stability of the modern world, so best you grab a coffee and get acquainted with them.

Who are these silent forces?
While Gordon Brown decided to flush the UK’s money down the toilet and the EU made a poor attempt at playing Robin Hood, the Asian and oil-rich countries decided on the cunning plan of investing their trade surpluses and oil profits for future generations by buying strategic assets across the world. To do this they set up state-backed investment vehicles called sovereign wealth funds.

Educated fingers in the air put the combined size of these funds at between $1.5 and $2.5 trillion (that’s a lot of noughts), and they’re expected to grow like they’re on steroids. To put this into context the size of the entire global stock markets is currently put at around $24.2 trillion.

The Quick History Lesson
Until quite recently there was a cosy agreement that the US would buy consumer goods from Asia and oil from the Middle East, and in return those countries would keep their revenues in Dollars and invest in US Treasuries. This worked well on several counts:

The US was massively in debt to the rest of the world; it needed $70 billion a month in capital inflows to cover its current account deficit.

The US was massively in debt to itself; the government was spending billions more than it was raising from taxes. One way out of that was to issue lots of Treasury bonds, which required willing buyers, like overseas governments.

In doing this China and others were propping up the Dollar and thereby keeping their own currencies artificially low. This kept their exports to the US cheap so they kept doing business.

So What Changed?
This all changed when a team of consultants did the rounds, pointing out that not only were the US Treasuries providing a paltry return on the billions invested, but also that the Dollars they were holding were going down more than Paris Hilton in that dodgy video. The money men were sent a few books on investment theory and came up with the bright idea of spreading their investments, targeting higher returns whilst diversifying their risk. I’d guess that half the seats on the investment committees went to political and military strategists. Buying the odd supermarket was all well and good, but a few banks, utilities and weapons manufacturers would look good on the portfolio.

The Big Swingers
Some funds date back to the days of the previous oil boom and have operated as normal investment funds; Abu Dhabi’s ADIA, the largest wealth fund at $875 billion, and Singapore’s Temasek date back to the mid 1970s and the Kuwait Investment Authority started in 1960.

But some of the more recent funds come from countries with slightly more colourful backgrounds. China is creating a $300 billion fund that some believe could grow by a mind-boggling $250 billion to $300 billion a year. It‘s already made the headlines buying stakes in US fund managers Blackstone and Barclays Bank and is interested in acquiring a stake in Bear Sterns. These guys have very deep pockets and they’re only at the start of the alphabet.

Russia is looking to add a $30 billion Future Generations Fund to its existing $24 billion fund.
Even more worrying is the newly created Libyan Investment Authority, which has $40 billion to play with.

The more level-headed Japan is considering diverting $700 billion from its vast foreign reserves to set up a sovereign-wealth fund to invest in overseas assets.

Invaders With Chequebooks
In the past the main worry was that if the US pulled China’s pigtails in the playground China could retaliate by selling some of its massive stock of Treasury bonds, driving up long term interest rates to recession-inducing levels. This could still happen, but it’s not a new risk.

The way I see it now is there are three major and very real threats:
1) The sums already invested in markets would allow the lunatic fringe to hold companies, or even countries, to ransom, threatening to dump stock across the globe if political or economic conditions weren’t met; a sort of James Bond baddy for pacifists. The recent sub-prime crisis illustrated the devastating effect of a group of persistent sellers.

2) Strategic holdings. It’s not so bad having Sainsburys run by the Arabs, though there might be changes in the produce sold, but the Russians or Libyans could achieve more as major stakeholders in BAE Systems or HSBC than by flying antiquated planes over UK airspace. Already shareholdings in EADS, makers of the Eurofighter, include sovereign funds from Russia and Dubai and there are rumours of Chinese interest in UK gas supplier BG.

3) These guys can spoil the party just by moving on; straightforward asset allocations could have an enormous effect on the markets in question. Figures just released show a net outflow of $69 billion of investment funds from the US in August. This was the first outflow since 1998 and only time will tell whether August was an aberration caused by the sub-prime crisis or part of a new trend of wealth funds switching assets to more attractive markets.

Does Anyone Give A Forex?
Predictably the UK doesn’t care, mainly because we’re a mixture of socialism and stupidity. We’re so keen to be fair we haven’t realised that increasingly other countries own our assets.

Equally predictably the US takes the threat seriously and has agencies that screen overseas investment proposals. The Committee on Foreign Investment in the United States has already discouraged deals such as the Chinese state oil company’s attempt to bid for an American energy group. When Dubai bought P&O last year the US forced it to sell off the 5 American port terminals acquired. US treasury secretary, Hank Paulson, has asked the International Monetary Fund to draw up guidelines for investments by government-run funds.

On Wednesday the Indian stock market plunged 9% after regulators proposed investment controls, aimed at overseas funds hiding their identity by investing via derivatives.

Even the limp-wristed EU Commissioner, Peter Mandleson (who ironically appears on spellchecker as ‘Meddlesome’), wants European governments to adopt measures, including golden shares, to prevent ownership of some companies by overseas government investors.

This weekend members of G7 (no, not the boy band G4 with some backing singers) meet to discuss matters of worldly importance and on the first day’s agenda are ‘discussions’ with nations that have sovereign wealth funds. The concluding comments will be interesting, but don’t relax just because someone stands on the steps with a piece of paper saying that they’ve negotiated peace for our time.