The Kuwait Investment Authority (KIA), the oil-rich nation’s sovereign wealth fund, is planning to triple its investment in Japan to $48 billion, highlighting a global investment shift away from U.S. assets.

The Kuwait sovereign wealth fund already has $15 billion to $16 billion invested in Japan, but Kuna, the nation’s state news agency, quoted Finance Minister Mustapha al-Shamali, as saying that the “KIA has an intention to double or triple its investment in the Japanese market.”

That investment boost would follow Japan’s recent agreement with Kuwait to reduce – or end – double taxation on interest, dividends, and capital gains. Japan has similar agreements with about 60 countries, but the deal with Kuwait is the Asian nation’s first with a Middle-Eastern state, according to the Financial Times.

KIA is currently invested in Japanese stocks and bonds, Shamali said, but is looking to expand into the nation’s real estate sector – and may also delve deeper into Japan’s stock market.

As Money Morning has been reporting for some time, Japan is becoming an increasingly alluring investment alternative to the United States – especially because of its growing involvement with China – a reality that global investors are beginning to grasp themselves. But Japan’s growing profit potential isn’t the only reason the KIA is engineering this shift.

An increased level of investment in Japan is part of Kuwait’s plan to diversify away from American assets. The country removed its currency peg to the U.S. dollar in May 2007, and the KIA has been dissatisfied by its investments in Citigroup Inc. (C) and Merrill Lynch & Co. Inc. (MER). Over the past two years, the KIA has raised the portion of money allocated to Asian investments from 10% to 20%.  The fund controlled approximately $270 billion at the end of March.

Kuwait is just one of many Middle Eastern states to benefit from the tidal swell of capital that’s been washed through the region, following the pull of record oil prices. And yet, increasingly cognizant that their oil money will dry up one day, Middle East nations are diversifying their investments for that future time. That’s one reason Dubai is repositioning itself as a gateway point for global trade and tourism, and is constructing the world’s largest airport, a project that’s creating profit plays for investors throughout the world. This realistic view of the future is also the reason that Gulf Arab states and companies spent about $60 billion on foreign assets in 2007, almost double the previous two years combined, according to Reuters.

However, foreign investment that has traditionally been earmarked for the United States is now pouring into developing markets with more growth potential.

Last month, the Financial Times reported that a large, unnamed Gulf fund had cut its dollar-denominated holdings from more than 80% a year ago to less than 60%.

Earlier this year, Qatar Investment Authority bought a 27% stake in Dragon Capital, a Vietnamese property fund. And in February, it bought a 15% stake in an Indian office development being built at the Bandra Kurla complex in Mumbai.

The fund has $60 billion in assets and more emerging market real estate investments are in the works.

"We are focusing on prime cities in India, China, Singapore, Korea, Vietnam and Malaysia, cities around the world where there is strong [gross domestic product] growth and fundamental unmet demand for high quality real estate," Navid Chamdia, head of real estate at Qatar Investment, told Bloomberg at a sovereign-wealth funds conference in Abu Dhabi. "About 40% of our real-estate investments will be in Asia."

Even China – which has strong investment ties with the United States – is diversifying away from the U.S. market. For instance, China’s State Administration of Foreign Exchange (SAFE) has been actively seeking deals with private equity firms in Europe as part of a specific strategy to reduce its dollar-denominated holdings. A shift in policy at China’s SAFE is particularly significant because it holds the vast majority of China’s $1.68 trillion of foreign currency reserves in dollar-denominated assets.

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State-run sovereign wealth funds are diversifying away from the U.S. dollar, as well as dollar denominated assets, at an unheralded pace, as the greenback’s protracted declined undermines the credibility of U.S. policymakers.

The Financial Times reported yesterday (Thursday) that one large, unnamed Gulf fund has cut its dollar-denominated holdings from more than 80% a year ago to less than 60%. Also, China’s State Administration of Foreign Exchange (SAFE) has been actively seeking deals with private equity firms in Europe as part of a specific strategy to reduce its dollar holdings.

A shift in policy at China’s SAFE is particularly significant because it holds the vast majority of China’s $1.6 trillion of foreign currency reserves in dollar-denominated assets. In addition, the FT reported, SAFE is encouraging the private equity firms with which it works to invest in natural resources companies in markets outside of the United States.

With U.S. markets roiled by the subprime meltdown, overseas investors are questioning the credibility of the Federal Reserve and Treasury Department when it comes to defending the dollar and maintaining financial stability.

"I thought the problem of off-balance sheet had gone way with Enron," the head of one Middle East fund told the FT.

While the shift may seem sudden, Rick Lloyd, head of G10 currency trading at ABN AMRO (OTC ADR: ABNYY) in Singapore, told Reuters that central banks and sovereign wealth funds have been scaling back their exposure to the dollar for some time now.

"That’s something that’s been happening over the course of time, there’s been a supply of dollars on any given rally," Lloyd said. "The dollar just seems to be getting pushed around in the backwater flows in other markets at the moment."

Inflation has clearly taken root in the U.S. economy with energy costs leading the way. Worse, continued stress throughout the financial markets, highlighted by difficulties at Fannie Mae and Freddie Mac last week has prohibited the Federal Reserve from raising its benchmark interest rate.

U.S. consumer prices, as measured by the Consumer Price Index (CPI), increased 1.1% in June, bringing the inflation rate for the past 12 months to 5%, well above the U.S. Federal Reserve’s preferred target of 2.0%.

"We have a stagnating economy with rising inflation," Joel Naroff, president and chief economist of Naroff Economic Advisors said in a note to clients after the CPI report was released. "Clearly, the rate of inflation and the slowdown in economic growth is nothing near what we saw in the 1970s, but the combination of the two is creating real problems for the Federal Reserve."

The dollar wobbled against the euro yesterday, but the single European currency in late-day trade was at $1.5866 dollars after 1.5821 dollars late Wednesday, the AFP reported.

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Starving for capital and hell-bent on retaining its handsome dividend, Barclays PLC (ADR: BCS) plans to raise $8.9 billion (4.5 billion pounds) by selling shares to investment banks and sovereign wealth funds around the world.

As much as 1.58 million shares will be sold to existing investors China Investment Bank and Singapore’s Temasek Holdings Pte. Ltd., as well as new investors Japan’s Sumitomo Mitsui Banking Corp., Qatar Investment Authority and Challenger – a fund that represents "the beneficial interests" of Qatar’s royal family.

Barclays, Britian’s fourth-largest bank, said the proceeds will help lift the bank’s Tier 1 capital ratio above its 5.25% target, preserve capital for its dividend and help the bank’s veiled acquisition plans, or "opportunities for new business," as Chief Executive Officer John Varley put it in a statement.

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"Through our capital raising today we strengthen our capital base and give ourselves additional resources to pursue our strategy of growth through earnings diversification. We position ourselves to capture opportunities for new business at attractive margins in our retail and commercial banking businesses and in investment banking and investment management," he said. "Our ability to capture the opportunities is reinforced by the new and strengthened relationships we have announced today." 

And though Varley didn’t say it, the capital is needed to catch up with rivals including Royal Bank of Scotland Group PLC (ADR: RBS) and also give a layer of armor to protect itself from the credit plague circulating throughout European banks.

"This is both a cushion against the market environment as well as a war chest," Georg Grodski, head of credit research at London-based Legal & General Group PLC (OTC ADR: LGGNY), told Bloomberg News.

As far as its dividend goes, the share sell has a Catch-22. The bank’s policy is to pay dividends and raise money for them based on underlying earnings per share. But for at least the short term, earnings per share "may be lower as a consequence of the issuance of the New Ordinary Shares," the bank said in the statement.

Little Help From Friends

Of the three major investors buying Barclays shares, two are established sovereign wealth funds: Singapore’s Temasek Holdings and Qatar Investment Authority, which Money Morning readers may remember from other recent billion-dollar investments.

In December, Merrill Lynch & Co. Inc. (MER), the largest U.S brokerage firm, said it would receive a needed cash infusion of $6.2 billion – with roughly $5 billion coming from Temasek Holdings. And in July 2006, the Singapore fund also paid $4 billion for a 12% stake in Standard Chartered Bank.

Two months ago, Qatar Investment Authority bought a 27% stake in Dragon Capital, a Vietnamese property fund, which will buy into offices and serviced apartments in Ho Chi Minh City. And in February, it bought a 15% stake in an Indian office development being built at the Bandra Kurla complex in Mumbai.

The fund has $60 billion to play with and one of its managers said that more emerging market real estate investments are in the works.

"We are focusing on prime cities in India, China, Singapore, Korea, Vietnam and Malaysia, cities around the world where there is strong [gross domestic product] growth and fundamental unmet demand for high quality real estate," Navid Chamdia, head of real estate at Qatar Investment, told Bloomberg at a wealth funds conference in Abu Dhabi. "About 40% of our real-estate investments will be in Asia."

They are just two of the several sovereign wealth funds, government cash pools, which have been investing in ventures from real estate to ailing financial juggernauts.

Dubbed the "Global Cash Barons" by Money Morning, these sovereign wealth funds currently control $3 trillion. Many experts expect that figure will soar to $12 trillion by 2015. For perspective, the estimated U.S. gross domestic product (GDP) for 2006 was slightly more than $13 trillion. Some forecasts say that they will control $20 trillion by the middle of the next decade.
The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others could be even larger.

And with such a fat wallet, foreign governments are watering both their own back yard and those of other economically dry countries and industries.

For an in-depth look at sovereign wealth funds, their motives and how to profit from them, check out Money Morning’s Investment Report: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street"

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Dubai, Saudi Arabia and China are among the nations that have employed the use of sovereign wealth funds (SWFs) to turn their massive cash surpluses into major league investments. Now India and Japan appear poised to take up the aggressive pursuit for high returns with SWFs of their own.

India is considering a fund that would seek a higher return on $300 billion in foreign reserves that is currently tied up in U.S. Treasuries and government bonds, the Financial Times reported.

"It may be possible to argue that a part of the reserves, which may be considered in excess of usual requirements, be managed with the primary objective of earning higher returns," Palaniappan Chidambaram, India’s finance minister, said in a written reply to Parliament.

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According to Chidambaram, the Council on Trade and Industry recommended to Prime Minister Manmohan Singh in a Dec. 18 meeting that the government "create a sovereign wealth fund of $5 billion to begin with, for financing acquisition of companies abroad."

India’s foreign exchange reserves, the third-largest holdings in Asia, stood at a record $311.89 billion as of April 4, compared with China’s record $1.68 trillion, Japan’s $987.7 billion and Russia’s $508 billion.

However, analysts say that while the formation of an Indian SWF is likely, it will be significantly smaller than other funds of the same nature. As one of the world’s leading oil importers, India has not enjoyed the large trade surpluses delivered to other developing economies on the back of a commodities boom. India also maintains sizeable account and fiscal deficits.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others may be larger.

Meanwhile, Japan may establish a sovereign wealth fund to boost returns on some of its state assets as early as 2009, according to UBS Securities Japan Ltd.

"As cases of inefficient use of the road-specific budget have been disclosed in Diet discussions, the argument that public funds should not be managed by bureaucrats has become convincing," Takashi Omori, chief Japan economist at UBS AG (UBS) in Tokyo, told Bloomberg News.

A relatively small state fund of between $98 billion (10 trillion yen) and $196 billion (20 trillion yen) may be created, he said.

Sovereign wealth funds currently control an estimated $3 trillion. That’s already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].

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The sovereign wealth funds of Qatar and Abu Dhabi, a United Arab Emirates state, have agreed to start up a $2 billion joint fund that will finance oil and petrochemical acquisitions. 

Qatar Investment Authority (QIA) and Abu Dhabi’s International Petroleum Investment Co. (IPIC) will each ante up $1 billion for the new fund, which will begin investing in "about September," Reuters reported.

"Both Qatar and the United Arab Emirates are focused on the long-term growth of our states… leveraging our combined investment expertise, we will target attractive opportunities on a global basis," Qatar Investment Authority Executive Board Member Hussain al-Abdulla said in a statement Thursday.

Abu Dhabi’s sovereign wealth fund holds about $875 billion in assets, The Economist reported, easily topping the list of largest sovereign wealth funds in the world. The emirate controls more than 90% of the U.A.E.’s oil reserves. 

Qatar’s sovereign wealth fund is worth about $50 billion. 

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Last year, QIA set up two $1 billion joint funds with Indonesia and emirate state Dubai.

Dubai Banking on U.S. Investments

Also yesterday (Thursday), the chief executive of Dubai Group, an investment firm owned by the ruler of Dubai, said he expects sovereign wealth funds to invest more in the struggling financial firms in the United States and Europe.

"People are really sensitive to it right now but I think that apprehension will start to disappear over a period of time. Sovereign wealth fund money will continue to flow to the [United States] and Europe in the coming years, as financial institutions will continue to need liquidity," Tom Volpe, Dubai Group chief executive officer told Emirates Business.

"Most financial institutions in the West, not just in the [United States], that are looking for capital tend to look at the Middle East. If you are looking for capital then it is the place you have to come to, which is very different from five or 10 years ago," he said.

Emirates Business is also owned by Dubai’s ruler, Sheikh Mohammed bin Rashid al- Maktoum.

In the interview, Volpe said Dubai Group is targeting returns in the 20%-plus range for its intended investment areas in 2008 – financial services, private equity, investment banking and exchange business.

Money Morning has extensively covered the many moves, motives and transactions of the world’s largest sovereign wealth funds (dubbed Global Cash Barons), including: Russia, Abu Dhabi, Dubai, China, Singapore, Qatar.

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Chile said it has begun diversifying its two sovereign wealth funds valued at more than $17 billion – with 20% to be invested in corporate bonds and 15% in stocks by the end of the year. 

"We are in transition to a new strategy," Eric Parrado, International Finance Coordinator at Chile’s Ministry of Finance, said at a London conference on sovereign wealth funds, Reuters reported.

A government-appointed panel recommended changes to the funds’ investment strategy. Previously, the funds allocated about 30% of assets to money market instruments. After official approval, that figure will be reduced to 5%.

Between the lines, the Chilean government is saying it’s buying stocks while they’re cheap.

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The strategy is similarly employed by other sovereign wealth funds from China, Kuwait, Abu Dhabi and Dubai. 

In recent months, sovereign wealth funds [or as Money Morning calls them, Global Cash Barons] have injected more than $70 billion into struggling commercial banks, brokerages and investment-banking institutions – most of them in the West.

In many cases – Citigroup being an excellent example – sovereign funds have snapped up prime U.S. assets with terrific long-term futures at near-term bargain prices.

Growing Global Presence

Sovereign wealth funds currently control an estimated $3 trillion in cash and other assets. That’s already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].

According to the International Monetary Fund (IMF), the state-run funds could control $12 trillion by 2015. Ultimately, says Money Morning Investment Director KeithFitz-Gerald, the total could actually reach $20 trillion by the middle of the next decade.

The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 – more than half of them since 2005 – bringing the total number of funds to nearly 40.
Most recently, the funds have provided bailout capital to such heavyweights as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS).
And in doing so, these massive cash pools are highlighting potential turnaround plays for investors.

"Sovereign wealth funds provide an important data point for investors," says Money Morning Investment Director Keith Fitz-Gerald. Despite what critics say, "sovereign funds operate out in the open, and their objectives become very clear. This is in stark contrast to the secret workings of hedge funds, that operate in private, and only divulge their holdings and objectives after the fact."

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We’ve talked extensively about the emergence of sovereign wealth funds (SWF) in global financial markets in recent months and much of that discussion has centered on China and the Middle East.

But there’s a new player in town: Russia.

As Bruce Willis’s iconic alter ego – John McClain of "Die Hard" fame – would say: "Welcome to the party, pal."

Go Forth and "Copy China"

As reported in both the Russian and Chinese media, Prime Minister Vladimir Putin’s hand-picked successor, First Deputy Prime Minister Dmitry Medvedev, made his first speech to Russian big-business recently. During the speech, Medvedev called on Russian companies to "copy China" by going on a global buying spree. He noted that foreign investment would bolster the Russian economy while cutting Russia’s dependence on foreign technology.

While the notion of cutting foreign dependence by buying the competition is straight out of Sun Tzu, what he said next really got my attention.

Medvedev pledged Kremlin support for companies that go on the hunt over assets abroad.

At the same time – well, practically anyway – Putin has gone on record saying that Russia will not remain a commodity supplier for long. He said, "either we become a raw material appendage to the global economy, which can eventually jeopardize Russia’s very existence, or we become a world leader and the best country to live in."

But Russia’s definition of an "international buying spree" is probably going to be very different from what we’ve seen from other nations so far.

Generally speaking, Chinese sovereign wealth funds don’t hesitate to pay huge premiums for assets if they also get access to the intellectual property behind those assets. The Blackstone Group LP (BX) deal is a great example. The Chinese could care less that they paid $3 billion for their share of the hedge-fund-master because they know they’re getting access to the very best deal-making know-how in the alternative-asset-management business – and that they can leverage what they learn from Blackstone in future global deals.

Middle Eastern sovereign funds, on the other hand, don’t seem to be so concerned about intellectual property. Instead, they’re pursuing a strategy that’s more like being "the house" in a Vegas casino, or owning any one of half a dozen legendary Bazaars in their part of the world. They don’t appear so concerned with the individual customers as they do with getting a tiny piece of every transaction, which is why they’ve gone after the world’s financial centers as well as diversified plays.

Here’s another interesting point: Neither of these so-called "Cash Barons" – from China or the Middle East – has pushed for management say-so or seats on their target companies boards of directors.

The Russian Model

History suggests the Russians will pursue a blend of these two strategies – but with an aggressive edge. It’s likely they’ll look to a combination of hard assets and operating businesses but in a uniquely Russian twist, they’ll probably seek actual control, too.

And that smacks of Russian nationalism.

Some will view this with suspicion and we concede that as natural. However, we also view this somewhat favorably, as merely the next step in the evolution of the global marketplace that we follow daily as part of the work we do for you through both Money Morning and The Money Map Report.

Here’s why.

Prior to Putin, Russia had descended into chaos. The Russian Mafia ruled openly and oligarchs gobbled up assets with incomprehensible efficiency. Under Putin, Russia has effectively reconstituted much of its society. His government has consolidated power as effectively as it has removed it from criminal elements in recent years. As for the oligarchs, they’ve either been taken to the woodshed, fled the country, or made peace with him.

And therein lies the strength.

Putin has uniquely identified a path to global success and put Russia on it. He’s also simultaneously removed potential roadblocks. Some view this as a Stalinist concentration of power to be feared. We think there’s another angle.

Putin is the first Russian leader in a generation to realize that a Russia that’s dependent on commodities alone will always remain what’s essentially a Global Second-Class Citizen, owing its standard of living, if not its very survival, to the health of the commodity markets.

And as sophisticated investors, we all know how volatile commodity prices can be. During bullish periods – when commodity prices are high, like they are now – we’ve seen how the nations that owe their livelihoods to petroleum, metals or other commodities flourish. And we’ve also seen what happens when commodity prices decline, as they do from time to time as part of the natural ebb-and-flow of the global marketplace.

Putin understands this cyclical threat to Russia’s economic and financial health as well as anyone, which is why he’s going on the offensive.

By investing heavily overseas – and taking control of key industries – Putin’s government is charting a path that harnesses Russia’s strong growth potential and keeps it headed in the right direction [Russia's gross domestic product is advancing by 6% or more. For purposes of comparison, consider that the U.S. economy is growing at less than 3%, while China's economy is advancing at better than 11% per annum].

Funding Controversy

Russia’s $1.3 trillion economy is right now rolling in cash from 10 straight years of growth – much of it fueled by oil prices and a global consumer-spending boom, according to The Financial Times.

Russia has been trying to emulate the soveriegn funds of Asia and the Middle East: In the first half of 2007, the most recent figures available, Russian companies invested $36.8 billion overseas.

But the country could have done more, and both Putin and Medvedev seem to realize this.

By hoarding its oil revenue, Russia has amassed a $157 billion "Stabilzation Fund." In January, that fund was split into two other funds:

• A "Reserve Fund"  that will be used to cushion Russia’s national budget against declines in market prices for oil.
• And a more growth-oriented "National Wealth Fund," which sounds to us like a conventional "sovereign wealth fund."

According to The FT, plans to invest the $32 billion National Wealth Fund in global stocks and corporate bonds have been delayed indefinitely amid fears over the global market downturn and infighting about how best to invest the capital.

What’s more, Sergei Storchak, the deputy finance minister in charge of overseeing the fund, was jailed and charged with an attempt to steal public funds. His arrest is viewed as yet another part of the Kremlin’s struggle to control the funds.

Leave it to Russia to keep things interesting.

Profit Plays

Despite the Kremlin machinations, we do believe that this more aggressive stance with regards to global investments will deliver results. That means that the big question for us, of course, is how to play this trend for profits.

One possibility is simply to pick up a few shares in the Market Vector Russia ETF Trust (RSX). A few weeks back, Editor Bill Patalon showed me a blog-post quip that investors who were "Russian" to make money were "Putin" their cash into that fund or into the Templeton Russia & East European Fund (TRF). Both funds will be volatile to be sure, but over the long haul will likely pay off very well.

If direct investments are more your speed – and if you truly have the stomach for the heightened volatility – another way to play Russia’s future is to consider Russian companies that are likely to go on international buying sprees. 

But consider this very insightful warning from my colleague, Horacio Marquez: "Many Russian companies have been delisting from the NYSE. They apparently neither care for our money nor need it and the high political risks that we have seen play shamefully in the past in Russia and those derived from highly illiquid pink-sheet stocks are a huge negative for otherwise very attractive business models."

While there are other stock opportunities, a likely front-runner with the size, scope and scale to be immediately accretive appears to be Gazprom OAO (PINK: OGZPY). Gazprom is Russia’s most valuable firm as measured by market capitalization – one of the Top 10 in the world by the same measure, and a company that is enjoying record profits as a result of high [and rising] global energy prices.

By the way, did I mention that Medvedev is also Gazprom’s chairman? Should he be elected as Putin’s replacement [which seems all but guaranteed on March 2], the company will have unparalleled Kremlin access in a post-Putin Russia.

Hmm…

Editor’s Note: For Money Morning’s brand-new investment research report, "Three Ways to Profit From Sovereign Wealth Funds – the ‘Next Wall Street’," please click here. The report is free of charge.

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The government of Qatar – operating through its state-run investment fund – is accumulating shares in Swiss banking giant Credit Suisse Group (CS) and says it intends to invest as much as $15 billion in U.S. and European bank stocks over the next year.

The announcement, made over the weekend by the prime minister of the Persian Gulf state is part of a major mobilization of capital that has what Money Morning has labeled as the "Middle East Cash Barons" bringing billions of dollars to bear on the U.S. and world banking sectors.

In the past year alone, these highly controversial state-run "sovereign wealth funds" have invested an estimated $70 billion in the world’s ailing banking system – most of them in the West. In the United States alone, the funds have provided bailout capital to the likes of Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER) and Morgan Stanley (MS) – financial-sector heavyweights whose balance sheets have been eviscerated by the subprime-spawned credit crisis. UBS AG (UBS) – also Swiss-based – has received Cash Baron bailout money, too.

During an interview late Sunday in the Qatar city of Doha, the prime minister, Sheikh Hamad bin Jasim bin Jaber al-Thani, told Bloomberg News that his country has "a relation with Credit Suisse and we bought some of the stock from the market, actually, but I cannot say what percentage because still we are in the process."

Sheikh Hamad is also the chief executive officer of the Qatar Investment Authority, the $60 billion sovereign wealth fund backed by the Qatar government. Currently, the fund has plans to double in size by 2010, with up to 40% of its investments in Asia, and the rest in Europe and the United States, according to research conducted by
London-based Standard Chartered PLC.

Sovereign Wealth Funds: The (Big) New Kids on the Block

Long the capitalist bastion, Wall Street is finally getting some competition, and is feeling the heat from these state-controlled investment pools known as sovereign wealth funds. Some – including the Kuwait Investment Authority – have been around since the 1950s.

Much of the money comes from crude-oil sales, which is why many of these government-operated venture pools are situated in the Middle East. And since oil prices have soared in recent years, these funds have turned into veritable "war chests" of capital that enable the states to mount ambitious acquisition and infrastructure-development jags.

The governments of such countries as Dubai, Saudi Arabia, China, Russia and Norway operate the big investment pools – and more are on the way. The capital was amassed chiefly through crude oil sales, although China started its fund with some of the estimated $1.3 trillion in foreign reserves racked up from the massive trade surpluses it routinely runs.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others may be larger. Some of the other top funds include Singapore’s Temasek Holdings Pte. Ltd., Mainland China’s China Investment Corp., and Dubai’s Dubai International Corp.

New funds have been announced in recent months.

Many of these Cash Barons are looking for more than just an investment return: They are seeking the deal-making know-how that over time will transform them into global financial titans. That quest induced the China-controlled State Foreign Exchange Investment Co. to invest $3 billion in the private-equity whiz The Blackstone Group LP (BX) back in April. The funds often take passive stakes, meaning they don’t demand management say-so and don’t seek seats on the target company’s board of directors.

Sovereign wealth funds currently control an estimated $3.2 trillion in assets. That’s already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].

The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. State-managed funds in countries including Kuwait, Abu Dhabi and South Korea have ballooned to $3.2 trillion in assets. Fueled by record oil prices and rising currency reserves, sovereign fund assets may gain fourfold to $12 trillion by 2015, equal to the capitalization of the Standard & Poor’s 500 Index, according to Morgan Stanley.

Money Morning Investment Director Keith Fitz-Gerald thinks the ultimate total will actually be much bigger: Even now, he estimates that the total capital under the control of the global Cash Barons is more likely to reach $20 trillion by the middle of the next decade.

The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 – more than half of them since 2005 – bringing the total to nearly 40 funds with total assets between $1.9 trillion and $2.9 trillion.

Needless to say, the funds have become the focus of controversy and concern in Washington. Congress is worried about the manner in which sovereign funds seem to have exploded onto the scene, the large and potentially influential stakes the funds have been taking in big U.S. investment-banking firms, and their lack of "transparency" – there’s no global equivalent of the U.S. Securities and Exchange Commission to force disclosure of their holdings or of their investment intent.

That lack of transparency is apparently a particular issue with the Qatar Investment Authority, which Standard Chartered cites as being among the world’s "most-secretive funds," a group that also includes those in the United Arab Emirates, Kuwait, China, Qatar, Brunei and Venezuela.

But some of its deals have been in the spotlight of late.

Among the deals the QIA pursued in order to diversify its assets and build its asset base in the European market was the purchase of a stake in the U.K.-based supermarket chain, J. Sainsbury PLC (OTC: JSAIY). Since the Qatari sovereign fund Delta Two acquired a 25% stake in the supermarket early in 2007, Delta Two had been expected to launch a bid for the entire chain for an estimated $21.7 billion. Delta Two is an affiliate of the Qatar Investment Authority.

But the full-scale takeover hit a snag, however, after the Sainsbury family and company pension-fund trustees balked at the structure of the deal, worrying that the supermarket will be burdened with a crushing level of debt.

In mid-January, Forbes.com reported that Delta Two transferred its entire 25% stake – 435.16 million shares – to state investment vehicle Qatar Holdings LLC, a wholly owned subsidiary of QIA, the primary investment vehicle.

As its interest in Credit Suisse underscores, Qatar wants to build a position in the global financial sector.

Last September, Qatar Holding purchased a 20% stake in the London Stock Exchange Group PLC. That stake was subsequently diluted to about 15% on Oct. 1 when the LSE finalized its $2.4 billion buyout of the Borsa Italiana SpA.

In other deals, the QIA has chalked up a 9.98% stake in the Nordic and Baltic exchange OMX, after buying 3.5% of the Nasdaq Stock Market Inc. (NDAQ), adding to its existing 20% stake.

But on Friday, the Nasdaq said it expects its $4.5 billion deal to acquire Nordic and Baltic stock exchange OMX through a complex tie-up with Borse Dubai Ltd. – a sovereign wealth fund affiliate of the state of Dubai – will close on Feb. 27. In a statement, Nasdaq said Borse Dubai had been successful in a tender offer for OMX shares, which paves the way for it to form the Nasdaq OMX Group. Separately, Borse Dubai said that after it exercises its options, it expects to hold a 97.6% stake in the entity.

Now, after agreeing to buy Qatar’s stake in OMX AB, Borse Dubai said it would consider an offer from Qatar to sell the shares it holds in the London Stock Exchange Group, in which Borse Dubai is the biggest shareholder, according to Bloomberg News.|

Back in September, when Borse Dubai cut its deal with OMX and Nasdaq, it said it would be left with a 20% stake in the Nasdaq and a 28% stake in the LSE. Qatar threatened to scuttle the deal, and bought the rivaling OMX stake and the 20% position in the London Stock Exchange. That forced Dubai to boost its own OMX offer.

According to Bloomberg, Dubai now owns 20.4% of LSE, 5% more than Qatar’s holding. Both sovereign investors saw their stakes get diluted when LSE on Oct. 1 completed its takeover of Borsa Italiana S.p.A.

Other QIA investments include 100% ownership of the U.K.-based Four Seasons Healthcare, a 97.3% stake in Lebanon’s BLC Bank SAL, and part of a 3.12% stake in European Aeronautic, Defence & Space Co. (EADS NV), the parent company of airliner maker and Boeing Co. (BA) rival Airbus Industries SAS, Standard Chartered said.

Switzerland’s second-biggest bank, Credit Suisse said on Feb. 12 that its fourth-quarter profit plunged 72% after taking a $1.2 billion write-down on debt and leveraged loans. The stock has fallen more than 30% since early October. UBS, Switzerland’s largest bank, has taken $14 billion in write-downs.

Credit Suisse already has ties to Qatar. In March 2006, it became the first European bank to get a license for the Qatar Financial Centre, a self-regulated business park designed to attract lenders to the Gulf state as part of Qatar’s ongoing plan to diversify its own

And when Qatar went after J. Sainsbury last year, Credit Suisse was one of the three Europe-based banks that agreed to underwrite billions of dollars in debt to help finance the buyout.

News and Related Story Links:

• Bloomberg News:
  Qatar Buys Credit Suisse Shares, Prime Minister Says.

• CNNMoney.com:
  UBS CEO says 2008 may not be as difficult as 2007.

• Money Morning Economic Forecast Report:
  Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street."

• CNNMoney.com:
  UBS: Banks Face $203B in Write-downs.

• Wikipedia:
  Doha, Qatar.

• Middle East Online:
  Qatar’s emir appoints new PM Sheikh Hamad appointed as Qatar’s PM, will continue to hold foreign affairs portfolio in new cabinet.

• Wikipedia:
  Qatar.

• MENAFN:
  Qatar Investment Authority fund expected to double in size by 2010.

• Money Morning News Analysis:
  Tough Talk About Sovereign Funds Spawns Fear of Economic Retaliation Against the United States.

• Forbes.com:
  Delta Two transfers its entire 25 pct Sainsbury stake to Qatar Holdings.

• Bloomberg News:
  Borse Dubai Would Consider Qatari Offer for LSE.

A year ago at this time, few investors had ever heard the term "sovereign wealth fund."

But now these government-controlled investment pools are making headlines virtually every day, and their cash is surfacing in deals of almost every type. Most recently, the funds have provided bailout capital to the likes of Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS) – financial-sector heavyweights whose balance sheets have been eviscerated by the subprime-spawned credit crisis.

In doing so, these massive cash pools are highlighting potential turnaround plays for investors.

"Sovereign wealth funds provide an important data point for investors," says Money Morning Investment Director Keith Fitz-Gerald. Despite what critics say, "sovereign funds operate out in the open, and their objectives become very clear. This is in stark contrast to the secret workings of hedge funds, that operate in private, and only divulge their holdings and objectives after the fact."

In the political arena – especially in Washington – these multi-billion-deals have transformed sovereign wealth funds into a topic of controversy. On Wall Street, these deals have made the funds an object of fear and uncertainty.

The New Robber Barons?

Here at Money Morning, we’re referring to sovereign wealth funds as "Global Cash Barons." By bringing their huge hordes of cash to bear on the financial problems of the day, the sovereign Cash Barons are – in a way – the modern manifestation of the 19th Century Robber Barons, the so-called "Captains of Industry" that novelist and philosopher Ayn Rand described as being among the "greatest benefactors of mankind … because they had brought the ‘greatest good’ and an impossible standard of living – impossible by all historical trends – to the country in which they functioned."

Call them sovereign wealth funds or Global Cash Barons, but the bottom line is this: The investments that these massive cash pools make over the next 12 months will be some of the biggest profit opportunities investors will find. Shrewd individual investors would do well to closely watch the moves they make – and follow suit wherever possible.

Wall Street, long the flagship of global capitalism, is being usurped by these state-controlled Cash Barons. These funds have been around since the 1950s, but they’ve become much more active of late – and it’s that increased activity that’s caused controversy.

The governments of such countries as Dubai, Saudi Arabia, China, Russia and Norway operate the big investment pools – and more are on the way. The capital was amassed chiefly through crude oil sales, although China started its fund with some of the estimated $1.3 trillion in foreign reserves it amassed from the massive trade surpluses it routinely runs.

The richest sovereign funds include the Abu Dhabi Investment Authority, or AIDA ($875 billion), the Government of Singapore Investment Corp. ($330 billion), and Norway’s Government Pension Fund Global, or GPFG ($322 billion), although several others may be larger [See the sidebar, "The Richest Cash Barons," at the end of this report.]

Some of the world’s top sovereign wealth funds include Singapore’s Temasek Holdings Pte. Ltd., Mainland China’s China Investment Corp., and Dubai’s Dubai International Corp.

New funds have been announced in recent months.

Many of these Cash Barons are looking for more than just an investment return: They are seeking the deal-making know-how that over time will transform them into global financial titans. That quest induced the China-controlled State Foreign Exchange Investment Co. to invest $3 billion in private-equity whiz, The Blackstone Group LP (BX) back in April. The funds often take passive stakes, meaning they don’t demand management say-so and don’t seek seats on the target company’s board of directors.

The Next Wall Street?

But their ultimate objective could well be to enable them to one day unseat Wall Street as the deal-making Mecca of the capitalist world.

It could happen.

Sovereign wealth funds currently control an estimated $3 trillion. That’s already believed to be more than the $1.5 trillion to $2 trillion held by worldwide hedge funds [though some sources put the hedge-fund estimate as high as $5 trillion].

The International Monetary Fund (IMF) and other experts predict the state-run venture funds could control $12 trillion by 2015. But Money Morning’s Fitz-Gerald thinks the ultimate total will actually be much bigger: Even now, he estimates that the total capital under the control of the global Cash Barons is more likely to reach $20 trillion by the middle of the next decade.

The growth rate is certainly accelerating. The U.S. Treasury says that 20 new funds have been created since 2000 – more than half of them since 2005 – bringing the total to nearly 40 funds with total assets between $1.9 trillion and $2.9 trillion.

If that happens, no matter which estimate proves the most accurate, it’s clear the state-run funds will be major financial forces in the world economy in just a few short years. For some context, consider that the estimated U.S. gross domestic product for 2006 was only slightly more than $13 trillion.

Fueling Angst

In recent months, these Cash Barons have injected more than $70 billion into struggling commercial banks, brokerages and investment-banking institutions – most of them in the West.

In many cases – Citigroup being an excellent example – sovereign funds have snapped up prime U.S. assets with terrific long-term futures at near-term bargain prices.

Add to that the fact that China – with its $1.3 trillion in foreign-exchange reserves – holds several hundred billion dollars of U.S. government debt, and it’s enough to cause considerable angst among Americans who believe that foreign governments are methodically placing themselves in a position of considerable potential influence.

That growing angst hasn’t gone unnoticed – by the governments that operate the funds, or the governments that oppose them.

In October, finance ministers and central bankers from the Group of Seven industrialized nations called for rules to guide international investments of government-run funds. But the G-7 officials weren’t advocating such rules out of fear of the funds or their motives – many of these countries operate funds themselves and were calling for the rules to head off a protectionist reaction to the funds’ perceived lack of transparency.

In December, U.S. Securities and Exchange Commission Chairman Christopher Cox said the growth of these state-directed funds may lead to an upsurge in political corruption because governments might attempt to exert influence over the companies or markets they’ve invested in.

And yet, banking companies worldwide need the capital – especially in the United States, where the subprime-mortgage debacle has badly mauled the leading players in the commercial banking, mortgage-lending, investment-banking and brokerage sectors. The question is: Without sovereign-wealth capital, where would the U.S. economy be right now?

That quandary seems to sum up the schizophrenic viewpoint most Americans have about sovereign wealth funds.

"They don’t like us, but they need our money," Kristin Halvorsen, finance minister of Norway, told Forbes magazine recently.

Norway’s sovereign wealth fund – recently described as a "model of rectitude" – has an investment of more than $300 billion spread across 700 companies, though it’s avoided the banking-bailout deals that are so popular with the Cash Barons of Asia and the Middle East.

One problem has been the lack of transparency: Sovereign funds have been notoriously loathe to reveal their holdings, which contradicts the basic nature of the U.S. financial system, where disclosure is a key tenet. Some of the funds are starting to be more forthcoming about their investments, and their alleged intent.

"Sovereign wealth funds, until recently, had a very bad reputation," says Stephen Jen, the chief currency strategist at Morgan Stanley, the U.S. investment bank that made a study of sovereign funds – and accepted an investment from one, too. "But there was no rebuttal. They said very little in their own defense. But going into a sector [like the U.S. financial-services sector] that is in desperate need of assistance is a form of rebuttal. They are refuting the notion that sovereign wealth funds are going to be a source of volatility, of uncertainty, or that they will disturb the market. What they have done is anything but."

In December, after booking $9.4 billion of write-downs on its way to a fourth-quarter loss, Morgan Stanley said it had sold a stake in itself to China Investment Corp. for $5 billion.

New Players to Debut

In late December, in a move that underscores the growing global importance of state-run investment pools, Saudi Arabia announced plans to establish a sovereign wealth fund that would eclipse Abu Dhabi’s multi-faceted $900 billion venture to become the largest in the world.

The new Saudi sovereign venture will probably be created and managed by the Saudi Arabia Public Investment Fund, which up until now has been limited to internal investments, The Financial Times reported. Previously, that country’s oil-generated wealth had been apportioned among the Saudi kingdom’s central bank, Saudi Arabian Monetary Agency, also known as SAMA, and partly into the personal coffers of the nation’s ruling family, the international financial newspaper reported.

This new fund will represent a major shift in the investment policy of SAMA, which, up to now, had been limited to conservative stocks and bonds, especially U.S. Treasuries.
Interestingly, while SAMA’s balance sheet is public information, banking-sector insiders in the region say that those figures portray only a sliver of Saudi Arabia’s actual wealth. The reason: The royal family has stakes in scores of investment vehicles, most of which are not known.

Contrast that with Saudi Arabia’s Persian Gulf peers, which have increasingly shifted their investment strategies to prepare for the day when the region’s oil reserves run dry:
These other countries have been investing in such alternative investments as high-risk hedge funds and other alternative investments. What’s more, as recent news reports underscore, these venture funds are increasingly taking direct stakes in major corporations – especially financial-service firms.

Unlike its peers in the Gulf, Saudi Arabia has expanded its spending and its budget for 2008 includes spending for important infrastructure projects, the Financial Times reported.

Abu Dhabi is one of the seven emirates that make up the United Arab Emirates. It, along with its neighbors Qatar and Dubai, have been making serious investments in many markets around the world, increasing their foothold as the financial epicenter of the Middle East and diversifying their revenues beyond their vast oil reserves.

India also is looking to start a sovereign fund of its own.

As long as investors understand that the Cash Barons of Asia and the Middle East appear to be in the game for deal-making know-how and long-term profits, the best way to play this newly emergent – but potentially powerful – market trend would be to follow along on some of the best investment deals these state-controlled investment funds make.
Let’s consider three.

A Turnaround to Bank on

Of all the financial-sector forays the Cash Barons have made to date, the one we like best at Money Morning is beleaguered U.S. banking giant Citigroup Inc. (C).

Citigroup – and financial-sector stocks in general – underscore why it’s shrewd investing strategy to follow the best sovereign-wealth fund plays. These state-run investment vehicles bought into the financial-services sector at a point one could argue was the absolute market nadir: Nobody wanted the shares, and analysts were actually rating them as "sells" in some cases.

But once the sovereign funds placed their bets, the private-equity crowd – a shrewd group themselves – subsequently followed suit.
"Financials are going to be a big sector play in 2008," Joseph Russell, a managing director at the Chicago-based hedge fund, Citadel Investment Group LLC, told The Wall Street Journal.
Many private equity firms have been laying the groundwork for months to make Russell’s prediction a reality.  In June, Washington, D.C.-based Carlyle Group announced the formation of a Financial Intuitions Group. The group – headed by Edward J. "Ned" Kelly III, the former chairman, president and CEO of Baltimore-based Mercantile Bankshares Corp., and David K. Zwiener, former president and COO of The Hartford Financial Services Group, Inc. (HIG) – will seek out global investments in the financial services sectors, including banking and insurance.
Kelly, The Wall Street Journal reports, is on the lookout for troubled firms that could benefit from an equity boost. He’s also watching for firms that are interested in divesting subsidiaries in order to raise some quick capital. Carlyle hasn’t set a firm budget for financial sector investments and is willing to invest up to $5 billion in the right deal.

If you were a sovereign-wealth-fund shadow investor, you’d have likely already made your investment in a bank or brokerage when you spotted the Carlyle Group’s announcement. If so, this is exactly what you’d want to see. Once you have your investment position, the more interest the stock attracts, the higher it will trade. And there’s a predictable progression: Once the private-equity folks invest, the mutual funds and money managers will follow. Only then, with the share price nearly fully recovered, the retail investor will finally ante up, sending your shares even higher into profitable territory.

But it’s important to follow the correct sovereign-wealth-fund investment. In terms of a financial-services play, we believe that investment is Citigroup.

At a recent price of $26.34, Citi’s shares are down 58% from their 52-week high of $55.55.

In my 1998 book, "Contrarian Investing: How to Buy and Sell When Others Won’t and Make Money Doing It," my co-author and I divined several key indicators that help investors identify which down-on-their luck corporations can actually be turned around. Citi already meets the key requirements we’d used to identify profitable stock plays.

• Its stock is down by at least 50% from its 52-week high.
• It has installed a new management team.
• And, in lieu of having heavy buying by insiders, Citicorp has received massive investments from what my co-author and I referred to as "knowledgeable outside investors."

In Citi’s case, those "knowledgeable outsiders" were almost all sovereign-wealth-fund buyers – once again buying in at bargain prices as U.S. investors were fleeing in terror. That’s a mistake.

With the help of these knowledgeable outside investors, Citigroup raised $22 billion in new capital. And the lion’s share came from Middle East Cash Barons, most of them state-controlled.

The first cash infusion came in November, when Citi received a $7.5 billion investment from Abu Dhabi Investment Authority (ADIA), the United Arab Emirate’s state-controlled sovereign wealth fund. Under the terms of the November investment, ADIA’s stake will not breach 4.9%, and it will have no managerial oversight.

And that was just the start.

In January, Citi announced that it had raised an additional $14.5 billion.

Saudi Prince Alwaleed bid Talal – a well-known Contrarian investor who already holds a 3.6% stake in Citi – boosted his stake in the bank to the 4.9% maximum permitted without triggering a U.S. regulatory review, Bloomberg News reported.

Alwaleed isn’t a sovereign fund – he’s a global juggernaut all by himself. For purposes of context, however, Alwaleed’s investment is still important to note. You see, it was Alwaleed who bailed out Citigroup-predecessor Citicorp Inc., with a $590 million investment in 1991. That 1991 turnaround foray made Alwaleed Citi’s largest individual shareholder for more than 15 years. Even recently, with Citi having shed half its value, Alwaleed’s investment was still worth approximately $6 billion.

And at the same time Citi announced Prince Alwaleed’s latest investment, the bank also disclosed that it would receive cash investments from sovereign wealth funds in Singapore and Kuwait, as well as an investment from former Chairman Sanford "Sandy" Weill.

The infusion includes nearly $7 billion from Singapore Investment Corp Pte., and $3 billion from the Kuwait Investment Authority.

This turnaround looks uncannily like the one that Prince Alwaleed helped Citicorp engineer back in the 1990s. That was a tremendously profitable venture for investors who took the plunge: investors who’d bet on Citicorp back then had snapped up shares that traded as low as $8.63 in 1991, and then rode them until the stock peaked at $140 a share in 1997, when my co-author and I were putting the finishing touches on our manuscript [These prices have not been adjusted to correlate with the subsequent merger with Travelers Group, or with today's Citi share prices].  [For a Money Morning investment research report that that chronicles the parallels between the two turnaround opportunities, please click here. The report is free of charge].

To understand the high probability of a profitable turnaround, Fitz-Gerald says investors need to keep several factors in mind:

• First, the core of Citigroup’s current problems were caused by a breakdown in risk management – and not a deterioration of the ongoing operations that will provide the profits and cash flow needed for the turnaround.
• Second, the company is globally diversified, and many portions of its business are enjoying very strong growth rates – especially those involved with China and Eastern Europe.
• The company is trading for a pittance: At current levels, the implied normalized earnings power of the company reflects a future stock price that could be as high as $60 a share.
• And even after the dividend cut, the stock has a dividend yield of nearly 5%.

 "Once again, at a time when most investors were running for the exits, some of the world’s savviest investors lined up to buy Citigroup shares," Fitz-Gerald wrote in a recent investment research report.

Deal Yourself In

Of all the sovereign-wealth-fund deals on the books right now, one of the best opportunities for profit is MGM Mirage (MGM), the Las Vegas-based casino-resort operator. But don’t let that description limit your thinking: Thanks to a financing deal from the state-run Dubai World, MGM is actually a high-profit play on China.

Let’s review that deal. Dubai World is essentially a holding company/investment vehicle for the state of Dubai. Last summer, when MGM shares were trading in the $80 range, Dubai World said it would invest $5 billion in MGM.

The goal: Help MGM execute its China strategy, which the Vegas gaming firm has been pursuing since the middle 1990s.

This China strategy has several facets. First, MGM has already invested an estimated $1 billion in Macau – like Hong Kong, a so-called "Special Administrative Region," or SAR. Casino companies like MGM or the Las Vegas Sands Corp. (LVS) are dropping billions in Macau, a resort area situated just off China’s southern coast, because gambling is legal there [it's banned on the mainland].

Indeed, for the nouveau riche of Asia, Macau’s white-hot "Cotai Strip" could easily one day eclipse its Vegas counterpart as the place global gamblers want to frequent.

But as a way of hedging its bets, MGM is also set to develop several billion dollars of additional real estate projects around the world through a joint venture with the Diaoyutai State Guesthouse of Beijing. The long list of projects begins with a series of non-casino hotels in second-tier China cities, where incomes are growing and such luxuries as "vacations" are becoming more the norm – but where Western marketing and branding are still in their infancy. That will allow MGM to roll out one of its typically sophisticated marketing campaigns [customized for China's culture and targeting its emerging middle class].

"At the most basic level, Dubai is hoping to grab a share of the ever-increasing power of the Chinese consumer at a time when China’s consumers have not yet formed opinions about branding or luxury travel experiences,’ said Fitz-Gerald, Money Morning’s investment director. "Given that Asian consumers in general – and Chinese consumers in particular – tend to be much more highly brand savvy than their European and American counterparts, this is an especially important strategy to execute at the present time."

What’s more, China isn’t MGM’s only target market overseas. It’s working with the Mubadala Development Co. in both Dubai and Abu Dhabi on some similar luxury-level [non-gaming] projects. Mubadala is an investment arm of the Abu Dhabi government.

MGM is on the verge of becoming a top global brand in the hospitality sector, and Dubai wants a piece of the action. Last summer, Dubai World launched a tender offer, hoping to acquire 9.5% of MGM’s shares. But it ended the initiative after MGM shares soared to new highs of more than $100 each, vowing to resume the effort if the stock price dropped.

In January, with the shares trading in the $66 range, Dubai World not only re-launched its tender offer, it boosted the number of shares it hoped to buy by 50% to 15 million. Only months after they’d sent the shares to record highs, U.S. investors had been abandoning MGM’s stock, worried that a downturn in consumer spending would torpedo the share price. But Dubai World knew a deal when it saw one.

"We’re a beneficiary to the degree that America’s on sale," MGM Chief Executive Officer James J. Murren told The Associated Press. "There is a significant, very-material influx of visitors coming to the United States, either from Canada, where the dollar’s at parity, or from Asia, or from Europe, and they’re finding great value here in America and certainly in Las Vegas. We clearly think the company’s undervalued."

So does Dubai.

That’s just how U.S. investors have to view this opportunity, says Fitz-Gerald.

"Dubai is getting in on the ground floor of some very powerful trends," he said in a recent interview. "It’s a classic Asian business strategy and one that reflects a very sophisticated understanding of how Asian consumers think and act when it comes to their money."

Let Your Profits Take Flight

Our third and last pick will be an indirect beneficiary of the emergence of the sovereign funds. It’s the airliner-maker and defense-industry giant, The Boeing Co. (BA).

As the Cash Barons transform deal-making into more of a global game, it’s only natural that worldwide travel will escalate. And with the work the funds are doing with such firms as MGM to promote tourism in Mainland China, Macau, Hong Kong and other destinations, worldwide tourism is certain to grow at a faster clip, as well.

What’s more, the Middle East Cash Barons are financing substantial new "destination-oriented" development in their home markets – especially Dubai, which is building glitzy hotels and has even constructed private islands in the interest of making itself into a venue that the newly affluent will want to sample and enjoy.

China alone will require 3,400 new airplanes worth about $340 billion over the next 20 years, Boeing projected in its recently updated annual forecast for the commercial airplane market. And that doesn’t even factor in other white-hot Asian markets – such as Vietnam – or these new travel destinations in the Middle East, all of which will also need to outfit their air fleets as their economies make the leap from "emerging" to mainstream.

During that same 20-year stretch addressed by Boeing’s market forecast, China would have the fastest-growing airliner market in the world, making it the biggest market outside the United States for new commercial airliners. In fact, if you average it out, from China alone you’re talking about sales of $17 billion a year.

Indeed, over the next 20 years, Boeing is forecasting that air carriers worldwide will need to acquire 28,600 commercial aircraft with a value of $2.8 trillion. The Boeing forecast is generally viewed as the world’s best analysis of the global market for commercial airliners and cargo aircraft.

The huge revenue potential of the global airliner market – combined with the low number of viable competitors and the high barriers faced by new potential entrants – is a big reason that Money Morning’s investment gurus all view Boeing as a promising global investment for years to come.

And there’s a bonus: Boeing is a major defense contractor, the kind of company that does well during the periods of global uncertainty like the one we face today.

The stock is down about 20% from its 52-week high. With a current Price/Earnings ratio of about 16 and a forward P/E of roughly 17.5, the stock isn’t pricey. Plus, it carries a dividend yield of nearly 2% – another plus at a time when stocks featuring income streams are worth the extra effort to ferret out.

The Emergence of the "Cash Barons"

Source: Money Morning Research.

Editor’s Note: Money Morning’s "Outlook 2008" series last covered soaring coal prices.

News and Related Story Links:

• Zawya.com/The Financial Times:
  Saudis Plan Huge Sovereign Fund Body.

• Money Morning News Analysis:
  Merrill Lynch is the Latest Beneficiary of Global "Cash Barons" Move on U.S. Financial Services Sector.

• Money Morning Investment Analysis:
  Citigroup: Why This Turnaround Play Has Legs – Big Ones.

• Zawya.com:
  Saudi Arabia Public Investment Fund.
• Money Morning News Analysis:
  Fang-Temasek Partnership the Latest in a String of High-Profile Sovereign Wealth Deals.

• Zawya.com:
  Saudi Arabia Monetary Agency.

• Money Morning News:
  Cash Infusion Brightens Morgan Stanley’s Dismal Fourth Quarter.

• Money Morning News Analysis:
  Surging Demand and a Nationwide Shortage: Why India Wants Coal for Christmas.

• Forbes:
  Dispatches from Davos – Sovereign Wealth Funds.

• Money Morning Investment Analysis:
  Here’s Why MGM is a High-Profit Play on China.

• Examiner.com:
  MGM Mirage, Dubai World Boost Offer.

• Money Morning News:
  Dubai World Halts Investments in MGM Shares – For Now – But Las Vegas Firm Still Offers Great Promise From China.

• Money Morning News:
  Citigroup Cuts Dividend, Receives Another Capital Infusion; Merrill Gets Cash Boost.

• Book:
  How to Buy and Sell When Others Won’t and Make Money Doing it.

• Money Morning Investment Research Report:
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The United States risks major retaliation against U.S. companies trying to do business overseas if Congress proposes new laws that will force so-called sovereign wealth funds to disclose more about their intent when it comes to U.S. investments, a senior U.S. Treasury Department official warned.

However, U.S. Sen. Charles E. Schumer – who serves as the chairman of the congressional Joint Economic Committee (JEC) – said that with state-run funds from Asia and the Middle East taking huge stakes in such companies as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER) and Morgan Stanley (MS), concern was escalating about the potential impact on the U.S. economy and even to U.S. national security.

In fact, Schumer said that if the International Monetary Fund (IMF) doesn’t devise a voluntary code of conduct for these state-run funds, Congress would study the need for legislation that forces the funds to become more "transparent" in how they operate.

"The question of the day is whether these huge pools of investment dollars, known as sovereign wealth funds, make the U.S. economy stronger or pose serious national security risks," Schumer said this week.

Controversy Over Sovereign Funds Grows

The debate about sovereign wealth funds – which Money Morning has dubbed the "Global Cash Barons" – has been escalating.

Sovereign-wealth funds currently control more than $3 trillion. The IMF and other experts predict the state-run venture funds could control $12 trillion by 2015. But Money Morning Investment Director Keith Fitz-Gerald thinks the ultimate number will actually be much bigger: Even now, he estimates that the total capital under the control of the global Cash Barons will be more in the region of $20 trillion by the middle of the next decade.

The U.S. Treasury says that 20 new funds have been created since 2000, more than half of them since 2005, bringing the total to nearly 40 funds with total assets between $1.9 trillion and $2.9 trillion.

In October, finance ministers and central bankers from the Group of Seven industrialized nations called for rules to guide international investments of government-run funds. But the G-7 officials weren’t making that move because they fear the funds or their motives – they were making the move to head off a protectionist reaction to the funds’ perceived lack of transparency.

In December, U.S. Securities and Exchange Commission (SEC) Chairman Christopher Cox said the growth of these state-directed funds may lead to an upsurge in political corruption because governments might attempt to exert influence over the companies or markets they’ve invested in.

But David McCormick, the U.S. Treasury Department’s top diplomat – he serves as the undersecretary for International Affairs – says that sovereign wealth funds can be a stabilizing influence on an economic system. The reason: They serve to keep investment capital circulating throughout an economy.

Restricting them could have serious implications – both financially and politically.

Sometimes, those implications are one and the same.

"If the United States imposed new restrictions, other countries could impose restrictions on U.S. investors, jeopardizing the benefits generated in the United States by U.S. businesses that operate globally," McCormick said in a statement he read to the congressional committee.

Foreign Funds Snap up Banking-Sector Bargains

Citigroup was already struggling with subprime-related problems last fall when it received a $7.5 billion cash infusion from the Abu Dhabi Investment Authority, or AIDA, the first of several investments it would receive.

Then, when it posted its fourth-quarter financial results back in mid-January, Citi posted its biggest-ever loss, slashed its dividend 41% and announced that it had raised an additional $14.5 billion to bolster its sagging balance sheet.

Some of that capital came from Prince Alwaleed Bin Talal, the noted Saudi Contrarian investor who was already a Citigroup shareholder. The rest of the money came from sovereign wealth funds in Singapore and Kuwait, as well as from former Chairman Sanford "Sandy" Weill.

The infusion includes nearly $7 billion from Singapore Investment Corp. Pte, and $3 billion from the Kuwait Investment Authority.

Merrill Lynch, which wrote-down $8.4 billion on its way to a third-quarter loss of $2.3 billion, announced it was getting a $6.6 billion investment from Kuwait, the Korean Investment Corp. and Mizuho Financial Group Inc. (MFG) of Japan.

In December, after booking $9.4 billion of write-downs on its way to a fourth-quarter loss, Morgan Stanley said it had sold a stake in itself to China Investment Corp. for $5 billion.

Code of Conduct the Answer?

McCormick said Treasury wants the IMF, with support from the World Bank, to develop a code of so-called "best practices" for sovereign wealth funds, giving the funds guidance on how they should structure themselves to better control risk.

According to Reuters, the funds, many of them in the Middle East – with additional ones in China and Russia – have soared in size because high oil and commodity prices and the soaring U.S. trade deficit have enabled foreign governments to accumulate massive war chests of cash. Now the state-run funds are looking to invest that capital in such stable markets as the United States.

While he acknowledged the funds’ newfound aggressiveness raises concerns, McCormick said a main worry was that Congress would pass laws retaliating against them and choke off a source of foreign investment. That would be a major strategic mistake for the United States, since sovereign wealth funds "are, in principle, long term, stable investors" that offer substantial benefits for the United States, McCormick said.

The governments that operate the funds could also retaliate against U.S. companies trying to do business in their countries, experts say.

McCormick said that all this is unnecessary. The reason: The odds that the funds will actually be disruptive, and harm their own investments, are very low.

Unlike their hedge-fund counterparts, sovereign-wealth funds are "typically not highly leveraged and cannot be forced by capital requirements or investor withdrawals to liquidate positions rapidly," McCormick said.

And that makes them a stabilizing force in the U.S. economy, he said.

During questioning, Schumer expressed doubt about the value of the screening process that is used to ensure foreign investments pose no threat to national security.

It was partly due to sovereign wealth funds that Congress strengthened the laws. Congress made the move after the inter-agency Committee on Foreign Investment in the United States (CFIUS) approved the acquisition of several U.S. port operations by state-owned Dubai Ports World.

Under the new law, CFIUS must keep Congress better informed, and also has to more closely scrutinize deals that are potential problems. But Schumer said that CFIUS is still "an opaque government panel led by Treasury," meaning that it was tough for Congress to know what was really going on.

McCormick countered by saying that the more open the process was while deals were being negotiated, the "more [of] a risk of the decision being politicized."

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