SWFs may purchase SDR-denominated instruments-State St

LONDON Aug 18 (Reuters) - Sovereign wealth funds may decide to purchase instruments denominated in Special Drawing Rights to diversify, create more efficient portfolios and promote it as an alternative to the dollar, State Street said on Tuesday.

SDRs, the International Monetary Fund's internal unit of account, have gained prominence recently when China proposed that they could be used as an alternative to the dollar as the world's reserve currency.

"SWFs may be in a position to promote the private use of SDRs as a unit of account and store of value," George Hoguet, senior portfolio manager at State Street Global Advisors, told a briefing.

"Through the purchase of SDR-denominated bonds and securities, these institutions may be able to develop a private market for SDR instruments."

The SDR basket is composed of 44 percent in the dollar, 34 percent in the euro, 11 percent in sterling and the yen respectively. The IMF will next review the weighting of the SDR in late 2010.

Presenting a report on sovereign wealth funds (SWFs), State Street estimated that there are 37 SWFs with estimated assets of $1 billion or more.

It also reckons the combined value of these funds is approximately $3.2 trillion, of which $2.2 trillion is sourced entirely from hydrocarbon.

State-owned funds have significantly reduced their headline activities since 2008 as the credit crisis hit the value of their investments and sharply lower oil prices weighed on their income and their ability to invest in new funds.

As a result, they were forced to reconsider asset allocation and investment strategies. Some of them have shifted focus away from aggressive overseas investments while others focused on domestic or strategic assets, such as mine and agriculture, which are in line with national economic policies.

"When the period of reorganising is over, we think they stand ready to contribute to the recovery of Western markets," John Nugee, State Street's head of official institutions group, said.

State Street Global Advisors manages more than $291 billion for 66 central banks and government clients. (Reporting by Natsuko Waki; Editing by Diane Craft)