Bahrain may be the smallest country in the GCC in terms of population and economy, but its Sovereign Investment industry is well developed, with two active SWFs: one for strategic and development purposes and another one for stabilization and savings function (Future Generation Reserve, or FGR). The FGR had been a relatively low-profile SWF until 2020, when the government of Bahrain withdrew US$ 450 million, or half of its assets back then, to maintain economic stability. The withdrawal was followed by a change in the deposit rules, and the fund has been growing again thanks to new inflows and strong investment returns. We were delighted to speak with FGR's Chief Executive Officer, Sheikh Ali Salman Ali Al Khalifa, about the fund’s plans and goals.
[GSWF] Bahrain’s expected GDP growth for 2024 and 2025 is 3.2%-3.3%, in line with 2023 and towards the goals of Economic Vision 2030. Which sectors do you expect this growth to be most significant?
[FGR] We anticipate that growth will be most significant in the sectors aligned with the Economic Vision, particularly in finance, technology, logistics, and tourism. With Bahrain's ongoing digital transformation, the financial services sector will remain strong, bolstered by fintech developments. Additionally, infrastructure projects and green initiatives are driving growth in construction and renewable energy.
[GSWF] Unlike some other GCC countries that use a SWF for all mandates, Bahrain splits the stabilization / savings and the strategic mandate. Do you think this model works better, from a governance perspective?
[FGR] The Kingdom of Bahrain’s dual-structure approach is highly advantageous, aligning with regional and international peers by segregating mandates for clear governance and effective ring-fencing. While our mandate focuses on minimizing dependence on the local economy to ensure we are not overexposed to domestic fluctuations, the strategic mandate drives national economic growth, contributing to long-term development. This separation allows each entity to concentrate on its core goals—whether stabilizing the economy or fostering strategic expansion—while ensuring we remain positioned to support the local economy in times of need. This structure ensures clarity in investment strategies and aligns with broader national objectives without compromising resilience.
[GSWF] In 2020, US$ 450 million, about half of its capital, was withdrawn from FGR, and in 2023, the royal decree was modified to be dependent upon the oil price. Do you see this as a positive change?
[FGR] The 2020 withdrawal was a necessary action aligned with FGR’s mandate as a stability and savings reserve. During that period of market turmoil, we played a crucial role in meeting fiscal requirements to support government initiatives, helping to maintain economic stability. This withdrawal was followed by the amendment of the Royal Decree, which further emphasized FGR’s crucial role in the Kingdom's economic framework. The amendment, making contributions oil price-dependent, has been instrumental in driving the growth of the reserve’s assets. Since its execution in 2023, it has provided the fund with greater flexibility to adapt to global market volatility while ensuring the sustainability of our long-term objectives and reinforcing FGR’s pivotal role in the Kingdom's financial resilience.
[GSWF] According to the latest annual report, FGR allocates 15.5% of its portfolio to alternative assets. How has this figure changed in the recent past, and how do you see it evolving in the next 5 years?
[FGR] Our allocation to alternatives has fluctuated between 15% and 35% over the last 5 years, reflecting our adaptive strategy. As traditional assets face increasing uncertainty and market dynamics continue to shift, we aim to position alternatives at the higher end of this range. This allows us to seek uncorrelated return streams, aligning with the broader industry trend. Over the next five years, we plan to further emphasize alternative allocation to name a few hedge fund strategies and private markets to enhance resilience and capitalize on opportunities beyond traditional investments.
[GSWF] Almost half of your portfolio is in the US, and 81% of it is exposed to the USD. How do you see the upcoming US elections, and geopolitics?
[FGR] Geopolitical risk is always on our radar, especially given our exposure to the USD and US markets. The upcoming elections could influence market sentiment and policy, but our diversified approach ensures we're well-positioned to navigate volatility. Additionally, we actively seize opportunities as they arise, which has helped us generate alpha, even though our returns are currently in the low double digits against our internal benchmark. We also keep a close watch on broader risks like trade tensions and regulatory shifts, ensuring our global strategy remains adaptable and resilient.
[GSWF] What are the latest returns of FGR that you can share with us?
[FGR] In 2023, we achieved a return of 9.6%, outperforming our benchmark, and between 2019-2023, our average return stands at 5.3%. This success is a direct result of our strategic focus on diversification and active management, keeping us well-aligned with our long-term objectives.
[GSWF] Several SWFs are building internal capabilities to minimize external managers and reduce fees – how does FGR see this strategy, and when do you think it makes sense to externalize?
[FGR] Building internal capabilities is certainly important for cost efficiency and gaining greater control over investment decisions. However, we also see immense value in maintaining dynamic partnerships with external managers. Our collaboration with asset managers allows us to benefit from their specialized expertise, particularly in niche markets and complex asset classes. These managers are true partners in our growth, and their commitment is reflected in how they structure fees, often compensating to align with our success. This approach, ensures that we remain agile, focused on performance, and strategically aligned for long-term growth.
[GSWF] FGR uses an array of different managers in each of the asset classes. What is your advice to asset managers reading this and keen to work with FGR and other Gulf SWFs?
[FGR] We prioritize long-term relationships with asset managers who demonstrate alignment with our objectives, strong performance, and a clear understanding of our unique risk tolerance. In our selection process, we evaluate the best 200 asset managers, considering their track record, reputation, and commitment to open communication and governance. My advice to asset managers is to focus on providing bespoke solutions that cater to our diversification needs. Those who can offer deep market insights and innovative strategies will find themselves well-positioned to partner with us.
[GSWF] CBRE was recently appointed as property manager for the FGR Tower. When is the opening expected and can you share more about the building’s sustainability and LEED-certified status?
[FGR] The FGR Tower, with CBRE as our property manager, has exceeded expectations in terms of demand, with significant interest from tenants eager to move in. We anticipate opening the tower within 12 months. The tower introduces a new standard to Bahrain, offering a globally recognized LEED-certified design, which sets it apart in the local market. Our design team has delivered a state-of-the-art building that not only meets sustainability benchmarks but also provides key features. This project reflects our commitment to innovative, sustainable development that enhances operational efficiency and aligns with the Kingdom of Bahrain’s green agenda.
[GSWF] FGR has performed above average in our GSR Scoreboard, especially when it comes to the “G”. How important is ESG for a Middle Eastern SWF?
[FGR] We consistently prioritize transparency and efficiency, and as a Middle Eastern SWF, we are committed to responsible investment principles, with governance remaining a top priority for our stakeholders. We believe there is significant potential to enhance our standing on the GSR Scoreboard, and we are eager to work more closely with you to achieve this. By collaborating, we can further refine our practices, ensuring alignment with global standards and demonstrating our commitment to a better future. This includes a stronger focus on environmental and social criteria, which are key elements of our long-term success strategy.
[GSWF] FGR invests in its employees and education. What do you think of Bahrain’s national talent pool, and what is your advice to young Bahrainis keen to develop a career in a SWF?
[FGR] We are committed to fostering an environment where our employees can thrive and reach their full potential. Bahrain is blessed with an exceptional national talent pool, particularly in its significant financial sector. My advice to young Bahrainis is to focus on standing out by embracing continuous learning, especially in key areas like finance, technology, and sustainability. These skills are critical for the future of both sovereign wealth funds and the broader financial sector, and those who excel in these areas will be well-positioned for success.
[GSWF] Personally, you have been at FGR for over 7 years now (the last 3 of them as CEO). How do you compare it with your previous role in Banking, and what are your main goals for the next 3-5 years?
[FGR] My career in banking, which began over 20 years ago, laid a crucial foundation for my experience. The concept of sovereign wealth funds (SWFs) and the introduction of the Santiago Principles in the mid-2000s marked a significant turning point. Although I always aspired to transition to a SWF role, I never anticipated it would become a reality. At FGR, I am dedicated to supporting our growth and ensuring that our efforts align with the Kingdom of Bahrain’s Economic Vision 2030. Over the next 3-5 years, my focus will be on enhancing our investment strategy, maintaining resilience in a dynamic global economy, and driving innovation and sustainability in our investments and partnerships.
