Sovereign wealth fund

A sovereign wealth fund (SWF) or sovereign investment fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Sovereign wealth funds invest globally. Most SWFs are funded by revenues from commodity exports or from foreign-exchange reserves held by the central bank. By historic convention, the United States' Social Security Trust Fund, with US$2.8 trillion of assets in 2014, and similar vehicles like Japan Post Bank's JP¥200 trillion of holdings, are not considered sovereign wealth funds.

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, pound, and yen). Such investment management entities may be set up as official investment companies, state pension funds, or sovereign 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 the Central Banking Journal.[1] 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 such as Citigroup, Morgan Stanley, and Merrill Lynch. These firms needed a cash infusion due to losses resulting from mismanagement and the subprime mortgage crisis.

SWFs invest in a variety of asset classes such as stocks, bonds, real estate, private equity and hedge funds. Many sovereign funds are directly investing in institutional real estate. According to the Sovereign Wealth Fund Institute's transaction database around US$9.26 billion in direct sovereign wealth fund transactions were recorded in institutional real estate for the last half of 2012.[2] In the first half of 2014, global sovereign wealth fund direct deals amounted to $50.02 billion according to the SWFI.[3]

Early SWFs

Sovereign wealth funds have existed for more than a century, but since 2000, the number of sovereign wealth funds has increased dramatically. The first SWFs were non-federal U.S. state funds established in the mid-19th century to fund specific public services.[4] The U.S. state of Texas was thus the first to establish such a scheme, to fund public education. The Permanent School Fund (PSF) was created in 1854 to benefit primary and secondary schools, with the Permanent University Fund (PUF) following in 1876 to benefit universities. The PUF was endowed with public lands, the ownership of which the state retained by terms of the 1845 annexation treaty between the Republic of Texas and the United States. While the PSF was first funded by an appropriation from the state legislature, it also received public lands at the same time that the PUF was created. The first SWF established for a sovereign state is the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait gained independence from the United Kingdom. According to many estimates, Kuwait's fund is now worth approximately US$600 billion.

Another early 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 $520 million.[5]

Nature and purpose

SWFs are typically created when governments have budgetary surpluses and have little or no international debt. It is not always possible or desirable to hold this excess liquidity as money or to channel it 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 economic, 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. Sovereign wealth funds invest in all types of companies and assets, including startups like Xiaomi and renewable energy companies like Bloom Energy.[6]

Concerns about SWFs

The growth of sovereign wealth funds is attracting close attention because:

  • 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.
  • Former U.S. Secretary of the Treasury Lawrence Summers has argued that the U.S. could potentially lose control of assets to wealthier foreign funds whose emergence “shake[s] [the] capitalist logic”[4] These concerns have led the European Union (EU) to reconsider whether to allow its members to use "golden shares" to block certain foreign acquisitions.[7] This strategy has largely been excluded as a viable option by the EU, for fear it would give rise to a resurgence in international protectionism. In the United States, 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.
  • SWFs are not nearly as homogeneous as central banks or public pension funds.
  • A lack of transparency and hence an increase in risk to the financial system, perhaps becoming the "new hedge funds".[8]

The governments of SWF's commit to follow certain rules:

  • Accumulation rule (what portion of revenue can be spent/saved)
  • Withdraw rule (when the Government can withdraw from the fund)
  • Investment (where revenue can be invested in foreign or domestic assets) [9]

Governmental interest 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 affects 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 modeled on a similar one by the U.S. Committee on Foreign Investments. Sovereign wealth funds are also increasing their spend. In fact, the Qatar wealth fund plans to spend $35 billion in the USA in the next 5 years.[10][11]

Santiago Principles

There were a number of transparency indices springing out before the Santiago Principles, some more stringent than others. To address these concerns some of the world's main SWFs come together in a summit in Chile on 2-3 September 2008, under the leadership of the IMF, they formed a temporary International Working Group of Sovereign Wealth Funds. This working group then drafted the 24 Santiago Principles, to set out a common global set of international standards regarding transparency, independence, and accountability in the way that SWFs operate.[12][13] These were published after being presented to the IMF International Monetary Financial Committee on 11 October 2008.[13] They also considered a standing committee to represent them and so a new organisation, the International Forum of Sovereign Wealth Funds (IFSWF) was then set up to maintain the new standards going forward and represent them in international policy debates.[14]

As of 2016 30[15] funds have formally signed up to the Principles representing collectively 80% of assets managed by sovereign funds globally or USD 5.5 trillion.[16]

New SWFs established in developed jurisdictions since 2010

New SWFs were established in various developed jurisdictions after 2010 following the rise in energy and commodity prices, e.g., the North Dakota Legacy Fund (2011) and the Western Australian Future Fund (2012). The Israeli Citizens' Fund should start operating in 2020 after several years of preparatory work involving veteran American as well as local asset management experts.[17]

Size of SWFs

Assets under management of SWFs increased for the fifth year running in 2013 to a record $5.78 trillion.[18] There was an additional $7.2 trillion held in other sovereign investment vehicles, such as pension reserve funds, development funds and state-owned corporations' funds and $8.1 trillion in other official foreign exchange reserves. Taken together, governments of SWFs, largely those in emerging economies, have access to a pool of funds totalling $20 trillion. Some of these funds could in future be channelled towards funding development of infrastructure for which there is global demand.

Countries with SWFs funded by oil and gas exports, primarily oil and gas exports, totalled $4.29 trillion as of the end of 2014.[19] Non-oil and gas SWFs totalled $2.82 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 Persian Gulf have a higher SWF-to-Foreign Exchange Ratio—for example, the Qatar Investment Authority (5.89 times) compared to the China Investment Corporation (0.12 times)—reflecting a more aggressive stance to seek higher returns.

Largest sovereign wealth funds

The United Arab Emirates, Kuwait, Norway, and Russia all have funds devoted to investing in oil and natural gas exports. Other countries with investment funds are as varied as China, Singapore, Chile, and the Pacific island nation of Kiribati.[20]

Country Abbreviation Fund Assets,
billions USD[21]
Inception Origin
NorwayGPFGovernment Pension Fund - Global10021990Oil
ChinaCICChina Investment Corporation941.42007Non-commodity
United Arab Emirates
    Abu Dhabi
ADIAAbu Dhabi Investment Authority8281976Oil
KuwaitKIAKuwait Investment Authority6421953Oil, Non-commodity
Saudi ArabiaSAMASAMA Foreign Holdings5141952Oil
Hong Kong(China)HKMAHong Kong Monetary Authority Investment Portfolio456.61993Non-commodity
ChinaSAFESAFE Investment Company441**1997Non-commodity
SingaporeGICGIC Private Limited3591981Non-commodity
QatarQIAQatar Investment Authority3202003Oil
ChinaNSSFNational Social Security Fund2952000Non-commodity
United Arab Emirates
    Dubai
ICDInvestment Corporation of Dubai209.52006Oil
SingaporeTHTemasek Holdings1971974Non-commodity
Saudi ArabiaPIF/SanabilPublic Investment Fund/Sanabil Investments1832008Oil
South Africa PIC Public Investment Corporation 160 1911 Non-Commodity[22]
United Arab Emirates
    Abu Dhabi
MDCMubadala Development Company1252002Oil
South KoreaKICKorea Investment Corporation122.32005Non-commodity
United Arab Emirates
    Abu Dhabi
ADICAbu Dhabi Investment Council1102007Oil
AustraliaAFFFuture Fund[23]102.32006Non-commodity
IranNDFNational Development Fund911999Oil
RussiaRNWFRussian National Wealth Fund72.22008Oil
FranceBPIfranceBpifrance68.35 ( €59.736 billion)2012Non-commodity
LibyaLIALibyan Investment Authority662006Oil
KazakhstanKNFKazakhstan National Fund64.72000Oil
KazakhstanS-K JSCSamruk-Kazyna JSC60.92008Non-commodity
United States of America
    Alaska
APFAlaska Permanent Fund[24]64.91976Oil
BruneiBIABrunei Investment Agency401983Oil
United States of America
    Texas
PSFPermanent School Fund37.7[25][26]1854Public Lands
MalaysiaKNKhazanah Nasional34.91993Non-commodity
United Arab Emirates
   (Federal)
EIAEmirates Investment Authority342007Oil
AzerbaijanSOFAZState Oil Fund of the Republic of Azerbaijan[27]33.11999Oil
NorwayGPFGovernment Pension Fund - Norway30.61967Non-commodity
Germany NWDF Nuclear Waste Disposal Fund 27.8 (€24.1bn) 2017 nuclear power plant operators
FranceFSIFonds stratégique d'investissement25.192008Non-commodity
New ZealandNZSFNew Zealand Superannuation Fund22.72003Non-commodity
United States of America
    Texas
PUFPermanent University Fund21.0[28]1876Public Lands
United States of America
    New Mexico
NMSICNew Mexico State Investment Council20.21958Non-commodity
OmanSGRFState General Reserve Fund181980Oil & Gas
Timor LesteTLPFTimor-Leste Petroleum Fund16.62005Oil & Gas
RussiaRRFRussian Reserve Fund16.22008Oil
ChileSESFSocial and Economic Stabilization Fund14.72007Copper
Canada
    Alberta
AHSTFAlberta Heritage Savings Trust Fund[29]13.41976Oil
RussiaRDIFRussian Direct Investment Fund132011Non-commodity
BahrainMHCMumtalakat Holding Company10.62006Oil
ChilePRFPension Reserve Fund9.42006Copper
IrelandNPRFNational Pensions Reserve Fund8.52001Non-commodity
PeruFSFFiscal Stabilization Fund7.91999Non-commodity
AlgeriaRRFRevenue Regulation Fund7.62000Oil
United States of America
    Wyoming
PWMTFPermanent Wyoming Mineral Trust Fund7.31974Minerals
BrazilSFBSovereign Fund of Brazil7.32008Non-commodity
MexicoORSFMOil Revenues Stabilization Fund of Mexico62000Oil
OmanOIFOman Investment Fund62006Oil
BotswanaPFPula Fund5.71996Diamonds & Minerals
Trinidad & TobagoHSF5.52007Oil
ChinaCADFChina-Africa Development Fund52007Non-commodity
AngolaFSDEAFundo Soberano de Angola4.62012Oil
United States of America
    North Dakota
NDLFNorth Dakota Legacy Fund4.32011Oil & Gas
ColombiaCSSFColombia Savings and Stabilization Fund3.52011Oil & Mining
United States of America
    Alabama
ATFAlabama Trust Fund2.71985Oil & Gas
KazakhstanNICNational Investment Corporation22012Oil
United States of America
    Utah
SIFTOUtah-SITFO21896Land & Mineral Royalties
United States of America
    Idaho
IEFIBIdaho Endowment Fund Investment Board21969Land & Mineral Royalties
Nigeria
   (Bayelsa State)
BDICBayelsa Development and Investment Corporation1.52012Non-commodity
NigeriaNSIANigeria Sovereign Investment Authority1.42011Oil
United States of America
    Louisiana
LEQTFLouisiana Education Quality Trust Fund1.31986Oil & Gas
PanamaFAPFondo de Ahorro de Panama1.22012Non-commodity
United Arab Emirates
    Ra's al Khaymah
RIARAKIA1.22005Credits obtained via RAK Government
BoliviaFINPROFund for Productive Industrial Revolution1.22012Non-commodity
United States of America
    Oregon
CSFOregon Common School Fund1.2[30]1859Public Lands
SenegalSSIFSenegal Strategic Investment Fund - FONSIS12012Non-commodity
IraqDFIDevelopment Fund for Iraq0.92003Oil
PalestinePIFPalestine Investment Fund0.82003Non-commodity
VenezuelaFEMFEM - Macroeconomic Stabilization Fund0.81998Oil
KiribatiRERFRevenue Equalization Reserve Fund0.61956Phosphates
VietnamSCICState Capital Investment Corporation0.52006Non-commodity
GhanaGPFGhana Petroleum Funds0.452011Oil
GabonGSWFSovereign Fund of the Gabonese Republic0.41998Oil
AlgeriaFNIFonds National d'Investissements0.352015Non-commodity
MauritaniaNFHRNational Fund for Hydrocarbon Reserves0.32006Oil & Gas
Australia
    Western Australia
WAFFWestern Australian Future Fund0.32012Minerals
MongoliaFSFFiscal Stability Fund0.32011Mining
Equatorial GuineaFFGFund for Future Generations0.082002Oil
Papua New GuineaPNGSWFPapua New Guinea Sovereign Wealth FundX2011Gas
TurkmenistanTSFTurkmenistan Stabilization FundX2008Oil & Gas
United States of America
    West Virginia
WVFFWest Virginia Future FundX2014Oil & Gas
MexicoFMPFondo Mexicano del Petroleo para la Estabilizacion y el DesarrolloX2014Oil & Gas
United Arab Emirates
    Sharjah
SAMSharjah Asset ManagementX2008Non-commodity
TurkeyTWFTurkey Wealth Fund24.1[31]2016Natural resources & Non-commodity

** This number is a best-guess estimation by the Sovereign Wealth Funds Institute.

See also

References

  1. "Who holds the wealth of nations?" (PDF). Central Banking Journal (May 2005, Volume 15, Number 4). Archived from the original (PDF) on 2008-05-29. Retrieved 2008-09-02.
  2. "Sovereign Funds Embrace Direct Real Asset Deals." SWF Institute. August 1, 2013. Retrieved August 21, 2013.
  3. Dunkley, Dan. "Sovereign-Wealth Funds Pump Near Record Amount of Cash in Deals". Wall Street Journal. Retrieved 2014-08-08.
  4. 1 2 M. Nicolas J. Firzli and Joshua Franzel: ‘Non-Federal Sovereign Wealth Funds in the United States and Canada’, Revue Analyse Financière, Q3 2014
  5. "The world's most expensive club". The Economist. 2007-05-24.
  6. "Sovereign-Wealth Funds Went Full Steam Ahead Direct Investing in 2014". Wall Street Journal. 2015-01-06.
  7. "Sovereign Wealth Funds: The New Hedge Fund?". The New York Times. 2007-08-01.
  8. Duncan, Gary (2007-06-27). "IMF concern over 'black box' funds of reserve rich nations". London: Times Online.
  9. "Rebuilding America: The Role of Foreign Capital and Global Public Investors | Brookings Institution". Brookings.edu. 2011-03-11. Retrieved 2016-10-05.
  10. Global, IndraStra. "How Are Sovereign Wealth Fund Decisions Made?". IndraStra. ISSN 2381-3652.
  11. "Qatar to invest $35bn in U.S. over 5 years". The WorldFolio.
  12. Sovereign Wealth Funds: Generally Accepted Principles and Practices (Santiago Principles), International Working Group of Sovereign Wealth Funds, October 2008
  13. 1 2 International Forum of Sovereign Wealth Funds. "Santiago Principles". Retrieved 27 September 2016.
  14. International Forum of Sovereign Wealth Funds. "About us". Retrieved 27 September 2016.
  15. International Forum of Sovereign Wealth Funds. "Our Members". Retrieved 27 September 2016.
  16. Hedge Fund Standards Board. "International Forum of Sovereign Wealth Funds (IFSWF) and Hedge Fund Standards Board (HFSB) establish Mutual Observer relationship". Retrieved 27 September 2016.
  17. "Israel natural gas wealth fund expected to begin around 2020". Reuters. April 4, 2017.
  18. "Sovereign Wealth Fund Institute. Retrieved on 2013-08-05". Swfinstitute.org. Retrieved 2016-10-05.
  19. "Fund Rankings | SWFI - Sovereign Wealth Fund Institute". Swfinstitute.org. Retrieved 2016-10-05.
  20. "Sovereign Investment Funds". Emerging Index. 2010-01-17.
  21. "Sovereign Wealth Funds Institute". Swfinstitute.org. Retrieved 2016-10-05.
  22. "PIC | Public Investment Corporation". www.pic.gov.za. Retrieved 2018-04-06.
  23. "Future Fund". Future Fund. Retrieved 2016-10-05.
  24. "Alaska Permanent Fund Corporation web site". Apfc.org. Retrieved 2016-10-05.
  25. "Texas Permanent School Fund". Texas Education Agency Website. TEA. Retrieved 7 January 2012.
  26. "Permanent School Funds Hits $25B Level". Texas Education Agency Website. TEA. Retrieved 7 January 2012.
  27. "ARDNF - Azərbaycan Respublikası Dövlət Neft Fondu - Home". www.oilfund.az. Retrieved 2018-08-07.
  28. "Permanent University Fund Semi-Annual Report" (PDF). University of Texas/Texas A&M Investment Management Company. December 31, 2017. Retrieved May 4, 2018.
  29. "Government of Alberta – Finance (AHSTF)". Finance.alberta.ca. 2015-04-01. Retrieved 2016-10-05.
  30. "About the Common School Fund". Oregon Department of State Lands. June 30, 2013. Retrieved March 1, 2015.
  31. http://www.hurriyetdailynews.com/turkey-transfers-stakes-worth-billions-in-major-public-companies-to-wealth-fund-109384 [39]]

Further reading

This article is issued from Wikipedia. The text is licensed under Creative Commons - Attribution - Sharealike. Additional terms may apply for the media files.