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Tickers in this Article: BRK.A, BRK.B, WMT, C, BSC, MER
Sovereign wealth funds(SWFs) have been the subject of ongoing criticism surrounding their large investments in U.S. equities. These pools of money are derived from a country's reserves, which are set aside for investment purposes that will benefit the country's economy and citizens. But as SWFs expand their activities in U.S. markets, there is growing concern that they hold the power to destabilize financial markets - and even the global economy - by making politically motivated investments. However, although SWFs have traditionally invested in debt instruments such as government bonds, Warren Buffett has argued that their investment in common stocks is no more risky.

"Our trade equation guarantees massive foreign investments in the U.S.; when we force-feed $2 billion daily to the rest of the world they must invest in something here. Why should we complain when they choose stocks over bonds?" Warren Buffett wrote in Berkshire Hathaway's (NYSE:BRK.A, BRK.B) 2007 Annual Letter to Shareholders.

Is Buffett correct? In a word, yes. But the real question investors should be asking is, what can we learn from the investment decisions of these sovereign wealth funds?

Asset Intermingling
Regardless of whether it is right or wrong from a foreign policy perspective, investments from sovereign wealth funds can probably only help to improve economic prosperity. The fact is, the world is shrinking fast. Companies from almost every nation are setting up shop in other nations and doing business there at a breakneck pace. As investment flows from one nation to another, all business benefits.

If sovereign wealth funds from other nations invest in the likes of Wal-Mart (NYSE:WMT), Citigroup (NYSE:C) and others, they will have a fiduciary incentive to encourage conditions that the improve the performance of those assets. Whether that means destroying trade barriers, improving economic conditions in their countries, or increasing the transparency of their own financial dealings, all are necessary in order for the investments they are making to prosper as much as possible and, therefore, to improve the global economy.

In other words, in the modern financial marketplace, old-world ideologies such as corporate nationalism or financial protectionism probably aren't going to help U.S. investors, at least not on the whole. On the other hand, a more open and accessible domestic equities market almost certainly will benefit investors. After all, with many U.S. stocks still reeling from the aftermath of the subprime meltdown, who are we to turn away the extra buying pressure provided by new entrants to the domestic equity market? (For related reading, see The Fuel That Fed The Subprime Meltdown.)

Should You Coattail Sovereign Smart Money?
Putting those potential fringe benefits aside for a minute, individual investors should be asking themselves a much more important question: Are the investment decisions of sovereign wealth funds going to beat the market? After all, regardless of your opinion on the policy implications of SWFs, your No.1 goal as an investor should always be to use the information available to make the best stock picks possible.

The current investments by SWFs have been into companies that have an international presence, and recently the focus has been centered on large cap banks and financial companies, such as Citigroup, Bear Sterns (NYSE:BSC), Merrill Lynch (NYSE:MER) and UBS (NYSE:UBS). These are precisely the types of companies that have been trading at depressed price levels due to the effects of the ongoing credit crunch.

So, is it a good idea take a contrarian position and coattail your way into some financial stocks right about now? Well, while the near-term prognosis for the group is certainly poor, for those investing with patience, the payoff ought to be substantial at the end. The largest international financial players' services will always be in demand and this creates a floor for the business value.

Unless some unforeseen bankruptcies come along and take out our leading financial firms, I'd say they should make out as great long-term investments for sovereign investors and coattailers alike.

The Bottom Line
Rather than spending time and effort debating whether sovereign wealth funds are appropriate entities to take sizable equity positions in leading U.S. companies, we as investors should take a minute to consider why sovereign wealth is readily choosing to invest in these depressed common stocks instead of government bonds. Surely governments take a long-term view of their portfolios, so investors with a long-term time horizon should seriously consider the merits of coattailing this new source of smart money.

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