Once seen as a bottomless resource, sovereign wealth funds (SWFs) are now feeling the effects of the credit crunch and are seeing a rapid downgrade to their growth outlook.

Experts say the funds are withdrawing from flashy investments abroad and may be used to prop up local economies.

SWFs have made their mark in Yorkshire over the years. The Singapore government's SWF is part of a consortium that owns Kelda, the parent company of Yorkshire Water.

A Dubai World company this year bought Gazeley, the property developer subsidiary of Asda, adding to its worldwide portfolio of companies that includes ferry operator P&O which operates from Hull.

St Martins Property Investment, the real estate investment arm of the state of Kuwait, owns properties in Leeds, including 8 St Paul's Street, and Simpson House, in Harrogate.

Dubai International Capital owns Travelodge, which has 21 hotels in Yorkshire, and Alliance Medical, which has NHS contracts to provide healthcare across the region. Their influence is likely to extend far beyond this, with SWFs often shielded by complex layers of ownership.

Now the future for SWFs is looking less rosy as the value of their investments sinks, tumbling oil prices reduce future income and governments eye the extra capital to reflate local economies.

As the pace of wealth generation slows, these funds may not only pull back from buying riskier assets but some may even be forced to cut investments to fund domestic fiscal needs, potentially adding stress to already frail world asset markets.

While many are convinced of their increasing role in the global economy, some are slashing forecasts on how rapidly assets managed by sovereign wealth funds – currently about $3 trillion – will grow.

Morgan Stanley now expects global SWF assets will grow to $10 trillion by 2015, down from their previous projection of $12 trillion. It expects total assets to hit $5 trillion by 2012, instead of by 2011 as previously forecast.

That outlook could be hit further if the oil price dips further and stock markets do not recover soon.

"We need to acknowledge that SWFs' firepower may have been constrained somewhat," said Stephen Jen, global head of
currency research at Morgan Stanley.

"We are now taking seriously the possibility that some SWFs may be forced to sharply slow down their pace of purchases of risky assets or, in extreme cases, liquidate parts of their portfolio in the coming year or so."

He estimates SWFs may have seen paper losses on the order of 25 per cent this year as global stock markets and other alternative asset markets declined.

The Abu Dhabi Investment Authority, considered the world's largest SWF, invested $7.5bn in Citigroup a year ago. Since then, Citi's share price has tumbled.

Apart from paper losses, other forces could slow growth of wealth funds in the longer term.

Oil, which is the main source of foreign currency revenues for nations with big SWFs, has fallen over $90 a barrel from its July record high to hover around $53.

"They are going to face severe restrictions on their operations. They're going to stop the trend towards ... glamour investment and big splash spending," said Alexander Mirtchev, chairman of the board of directors of Kazakhstan's Kazyna fund.

Mr Mirtchev said SWFs were likely to shift their focus on productive assets that are related to their own economies, such as natural resources or technologies, in order to survive.

"They are going to unload non-core assets they have acquired during the boom times. They are not going to buy hotels in Bermuda when countries need something else," he said.

Martin Shaw, Leeds-based head of European corporate at Pinsent Masons, said SWFs are not alone in cutting back on spending – corporate activity across the board has slowed considerably in recent months.

"There's been a huge slowing of corporate activity and it's to do with everything you read about in the press every day."

Mr Shaw, who worked on behalf of Asda-Walmart on the sale of Gazeley, disagreed with the suggestion the secretive funds are being forced to invest inwards. Instead he believes it is more a case of access to debt financing.

"I don't think there's evidence of looking inwards," he said

"It's really to do with the fact that access to world debt is more restricted. Whether based in India, the Middle East or the Far East, the states themselves are extremely wealthy.

"But in efficiency terms even though they are wealthy they do use debt as it's an efficient way to organise an acquisition. Of course that type of debt in the market is more restricted."

He said while they may be experiencing a short-term dip in outlook, they are built on solid foundations. He said along with private equity funds, SWFs may look to the new year to begin spending once more.

"Why not wait until the first quarter of 2009?" he said.

"The value of oil may go down but it will go up again."

Whatever the reason for the slump, more important still is when the tap of funding is turned back on.

WEALTH OF NATIONS

Sovereign wealth funds are state-owned investment fund comprised of assets such as stocks, bonds, real estate, and other financial instruments.

They typically originate from foreign currency reserves, gold, pension investments and oil funds.

The largest sovereign wealth funds in order of size are:

United Arab Emirates – Abu Dhabi Investment Authority – assets worth an estimated $875bn

Norway – Government Pension Fund of Norway – assets worth an estimated $391bn

Singapore – Government of Singapore Investment Corporation – assets worth an estimated $330bn

Kuwait – Kuwait Investment Authority – assets worth an estimated $264bn

China – China Investment Corporation – assets worth an estimated $200bn

Singapore – Temasek Holdings – assets worth an estimated $159bn

Australia – Australian Government Future Fund – assets worth an estimated $81bn

Qatar – Qatar Investment Authority – assets worth an estimated $60bn