Sovereign wealth fund

A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Most SWFs are funded by foreign exchange assets.

Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its management of a nation's banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings that are invested by various entities for the purposes of investment return, and that may not have a significant role in fiscal management.

The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, Special Drawing Rights (SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations that are typically held in domestic and different reserve currencies such as the dollar, euro and yen. Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others.

There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. Sovereign wealth funds can be characterized as maximizing long term return, with foreign exchange reserves serving short term currency stabilization and liquidity management. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover it is widely believed most have diversified hugely into assets other than short term, highly liquid monetary ones, though almost no data is publicly available to back up this assertion. Some central banks have even begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like overnight interest rate swaps).

History

The term sovereign wealth fund was first used in 2005 by Andrew Rozanov in an article entitled, 'Who holds the wealth of nations?' in Central Banking journal. The previous edition of the journal described the shift from traditional reserve management to sovereign wealth management; subsequently the term gained widespread use as the spending power of global officialdom has rocketed upward.

Some of them have grabbed attention making bad investments in several Wall Street financial firms including Citigroup, Morgan Stanley, and Merrill Lynch. These firms needed a cash infusion due to losses resulting from mismanagement and the subprime mortgage crisis.

Early SWFs

Sovereign wealth funds have been around for decades but since 2000, the number of sovereign wealth funds has increased dramatically. The first SWF was the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait even gained independence from the United Kingdom. According to many estimates, Kuwait's fund is now worth approximately $300 billion.

Another of the first registered SWFs is the Revenue Equalization Reserve Fund of Kiribati. Created in 1956 when the British administration of the Gilbert Islands in Micronesia put a levy on the export of phosphates used in fertilizer, the fund has since then grown to $520m.

Nature and purpose

SWFs are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel into immediate consumption. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. In such countries, the main reason for creating a SWF is because of the properties of resource revenue: high volatility of resource prices, unpredictability of extraction, and exhaustibility of resources.

There are two types of funds: saving funds and stabilization funds. Stabilization SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles' adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway. It is believed that SWFs in resource-rich countries can help avoid resource curse, but the literature on this question is controversial. Governments may be able to spend the money immediately, but risk causing the economy to overheat, e.g. in Hugo Chávez's Venezuela or Shah-era Iran. In such circumstances, saving the money to spend during a period of low inflation is often desirable.

Other reasons for creating SWFs may be economical, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf war managed excess reserves above the level needed for currency reserves (although many central banks do that now). The Government of Singapore Investment Corporation and Temasek Holdings are partially the expression of a desire to bolster Singapore's standing as an international financial centre. The Korea Investment Corporation has since been similarly managed.

Concerns about SWFs

There are several reasons why the growth of sovereign wealth funds is attracting close attention.

• As this asset pool continues to expand in size and importance, so does its potential impact on various asset markets.

• Some countries worry that foreign investment by SWFs raises national security concerns because the purpose of the investment might be to secure control of strategically important industries for political rather than financial gain. These concerns have led the EU to reconsider whether to allow its members to use "golden shares" to block certain foreign acquisitions. This strategy has largely been excluded as a viable option by the European Union, for fear it would give rise to a resurgence in international protectionism. In the U.S., these concerns are addressed by the Exon–Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, § 5021, 102 Stat. 1107, 1426 (codified as amended at 50 U.S.C. app. § 2170 (2000)), as administered by the Committee on Foreign Investment in the United States (CFIUS).

• Their inadequate transparency is a concern for investors and regulators: for example, size and source of funds, investment goals, internal checks and balances, disclosure of relationships, and holdings in private equity funds. Many of these concerns have been addressed by the IMF and its Santiago Principles, which set out common standards regarding transparency, independence, and governance.

• SWFs are not nearly as homogeneous as central banks or public pension funds. However, they do have a number of interesting and unique characteristics in common. These make them a distinct and potentially valuable tool for achieving certain public policy and macroeconomic goals.

Developments in 2008

• On 5 March 2008, a joint sub-committee of the U.S. House Financial Services Committee held a hearing to discuss the role of 'Foreign Government Investment in the U.S. Economy and Financial Sector'. The hearing was attended by representatives of the U.S. Department of Treasury, the U.S. Securities and Exchange Commission, the Federal Reserve Board, Norway's Ministry of Finance, Singapore's Temasek Holdings and the Canada Pension Plan Investment Board.

• On August 20, 2008, Germany approved a law that requires parliamentary approval for foreign investments that endanger national interests. To be specific, it will affect acquisitions of more than 25% of a German company's voting shares by non-European investors; but the economics minister Michael Glos has pledged that investment reviews would be "extremely rare". The legislation is loosely modelled on a similar one by the U.S. Committee on Foreign Investments.

• On September 2–3, 2008, at a summit in Chile, the International Working Group of Sovereign Wealth Funds - consisting of the world's main SWFs - agreed to a voluntary code of conduct first drafted by IMF. They also considered a standing committee to represent them in international policy debates. The 24 principles in the draft (the Santiago Principles) were made public after being presented to the IMF governing council on October 11, 2008.

Size of SWFs

Assets under management of SWFs increased to $4.7 trillion in July 2011, increase of $700 billion from 1 year ago. There was an additional $6.8 trillion held in other sovereign investment vehicles, such as pension reserve funds, development funds and state-owned corporations’ funds and $7.7 trillion in other official foreign exchange reserves.

Countries with SWFs funded by commodities' exports, primarily oil and gas exports, totalled $2.7 trillion at the end of 2010. Non-commodity SWFs totalled $1.5 trillion. Non-commodity SWFs are typically funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses and privatisation revenue. Asian countries account for the bulk of such funds.

An important point to note is the SWF-to-Foreign Reserve Exchange Ratio, which shows the proportion a government has invested in investments relative to currency reserves. According to the SWF Institute, most oil-producing nations in the gulf have a higher SWF-to-Foreign Exchange Ratio - for example, the Qatar Investment Authority (5.89x) compared to the China Investment Corporation (.12x) - reflecting a more aggressive stance to seek higher returns.

Largest sovereign wealth funds

See also: List of countries by sovereign wealth funds and List of countries by foreign exchange reserves

Country Abbreviation Fund Assets $Billion Inception Origin United States of America OASI Old Age Survivors Insurance Trust Fund 2,429.0 1939 Payroll Taxes United States of America DI Disability Insurance Trust Fund 179.9 1957 Payroll Taxes United States of America HI Medicare Hospital Insurance Trust Fund 271.9 Payroll Taxes United States of America SMI Supplementary Medical Insurance Trust Fund 72.1 Payroll Taxes United Arab Emirates     Abu Dhabi ADIA Abu Dhabi Investment Authority 627 1976 Oil China SAFE SAFE Investment Company 567.9** 1997 Non-commodity Norway GPF Government Pension Fund - Global 560 1990 Oil Saudi Arabia SAMA SAMA Foreign Holdings 472.5 n/a Oil China CIC China Investment Corporation 409.6 2007 Non-commodity Kuwait KIA Kuwait Investment Authority 296 1953 Oil China    Hong Kong HKMA Hong Kong Monetary Authority Investment Portfolio 293.3 1993 Non-commodity Singapore GIC Government of Singapore Investment Corporation 350 1981 Non-commodity Singapore TH Temasek Holdings 157 1974 Non-commodity Canada CPPIB CPP Investment Board 152.3 1997 Non-Commodity Canada     Québec CDPQ Caisse de dépôt et placement du Québec 151.7 1965 Non-Commodity China NSSF National Social Security Fund 146.5 2000 Non-commodity Russia RNWF National Welfare Fund 142.5* 2008 Oil Qatar QIA Qatar Investment Authority 85 2003 Oil Australia AFF Future Fund 93.1 2004 Non-commodity Libya LIA Libyan Investment Authority 70 2006 Oil Algeria RRF Revenue Regulation Fund 56.7 2000 Oil United Arab Emirates     Abu Dhabi IPIC International Petroleum Investment Company 48.2 1984 Oil United States of America     Alaska APF Alaska Permanent Fund 39.7 1976 Oil Kazakhstan KNF Kazakhstan National Fund 38.6 2000 Oil South Korea KIC Korea Investment Corporation 37 2005 Non-commodity Malaysia KN Khazanah Nasional 36.8 1993 Non-commodity Malaysia PNB Permodalan Nasional Berhad 1978 Non-commodity Malaysia TH Tabung Haji 1972 Non-commodity Malaysia KWSP Employees Provident Fund 1983 Non-commodity Malaysia LTAT Lembaga Tabung Angkatan Tentera 1993 Non-commodity Ireland NPRF National Pensions Reserve Fund 33 2001 Non-commodity Brunei BIA Brunei Investment Agency 30 1983 Oil France SIF Strategic Investment Fund 28 2008 Non-commodity Azerbaijan SOFAZ State Oil Fund of the Republic of Azerbaijan 25.8 1999 Oil Iran NDF National Development Fund 24.4 2011 Oil Chile SESF Social and Economic Stabilization Fund 21.8 1985 Copper United Arab Emirates     Dubai ICD Investment Corporation of Dubai 19.6 2006 Oil Canada     Alberta AHF Alberta's Heritage Fund 14.4 1976 Oil United States of America     New Mexico NMSIOT New Mexico State Investment Office Trust 13.8 1958 Non-commodity United Arab Emirates     Abu Dhabi MDC Mubadala Development Company 13.3 2002 Oil New Zealand NZSF New Zealand Superannuation Fund 12.1 2003 Non-commodity Bahrain MHC Mumtalakat Holding Company 9.1 2006 Oil Brazil SFB Sovereign Fund of Brazil 8.6 2009 Non-commodity Oman SGRF State General Reserve Fund 8.2 1980 Oil & Gas Botswana PF Pula Fund 6.9 1996 Diamonds & Minerals Timor Leste TLPF Timor-Leste Petroleum Fund 6.9 2005 Oil & Gas Saudi Arabia PIF Public Investment Fund 5.3 2008 Oil China CADF China-Africa Development Fund 5.0 2007 Non-commodity United States of America     Wyoming PWMTF Permanent Wyoming Mineral Trust Fund 4.7 1974 Minerals Trinidad & Tobago HSF Heritage and Stabilization Fund 2.9 2000 Oil United Arab Emirates     Ra's al Khaymah RIA RAK Investment Authority 1.2 2005 Oil Nigeria NSIA Nigerian Sovereign Investment Authority 1 2011 Oil Venezuela FEM FEM 0.8 1998 Oil Vietnam SCIC State Capital Investment Corporation 0.5 2006 Non-commodity Kiribati RERF Revenue Equalization Reserve Fund 0.4 1956 Phosphates Indonesia GIU Government Investment Unit (Pusat Investasi Pemerintah (PIP)) 0.3 2006 Non-commodity Mauritania NFHR National Fund for Hydrocarbon Reserves 0.3 2006 Oil & Gas United Arab Emirates    (Federal) EIA Emirates Investment Authority X 2007 Oil Oman OIF Oman Investment Fund X 2006 Oil United Arab Emirates     Abu Dhabi ADIC Abu Dhabi Investment Council X 2007 Oil United States of America     Texas PUF Permanent University Fund 12.8 1876 Public Lands United States of America     Texas PSF Permanent School Fund 25 1854 Public Lands

* This includes the oil stabilization fund of Russia.
** This number is a best guess estimation.

See also

• National wealth
• Central bank
• Pension fund
• Sovereign investment fund
• Global financial system

Bibliography

Saleem H. Ali and Gary Flomenhoft. "'Innovating Sovereign Wealth Funds "[1] Policy Innovations, February 17, 2011.

M. Nicolas J. Firzli & Vincent Bazi, “Infrastructure Investments in an Age of Austerity : The Pension and Sovereign Funds Perspective”, USAK/JTW July 30 2011 and Revue Analyse Financière, Q4 2011

Xu Yi-chong and Gawdat Bahgat, eds. The Political Economy of Sovereign Wealth Funds (Palgrave Macmillan; 2011) 272 pages; case studies of SWFs in China, Kuwait, Russia, the United Arab Emirates, and other countries.

Lixia, Loh. "Sovereign Wealth Funds: States Buying the World" ( Global Professional Publishing: 2010).

External links

• SWF Institute Organization dedicated to Studying Sovereign Wealth Funds
• Sovereign wealth funds brim with money from Reuters

• International Forum of Sovereign Wealth Funds IFSWF is a voluntary group of SWFs - Set up by IMF
• The impact of the global economic crisis on sovereign wealth funds
• The so-called "Sovereign Wealth Funds": regulatory issues, financial stability and prudential supervision - European Economy, Economic Papers, April 2009.
• The impact of sovereign wealth funds on global financial markets - European Central Bank, Occasional Paper No 91. July 2008.
• Linaburg-Maduell Transparency Index - Point system on grading sovereign wealth fund transparency
• Santiago Principles