Sovereign wealth fund

A sovereign wealth fund (SWF), sovereign investment fund, or social wealth 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.

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]

According to a 2014 study, SWFs are not created for reasons related to reserve accumulation and commodity-export specialization. Rather, the diffusion of SWF can best understood as a fad whereby certain governments consider it fashionable to create SWFs and are influenced by what their peers are doing.[7]

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, like the United States, which passed the Foreign Investment and National Security Act of 2007, 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.[8] 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".[9]

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)[10]

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 20 August 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 US in the next 5 years.[11][12]

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 Santiago, 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.[13][14] These were published after being presented to the IMF International Monetary Financial Committee on 11 October 2008.[14] 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.[15]

As of 2016, 30[16] funds have formally signed up to the Principles representing collectively 80% of assets managed by sovereign funds globally or US$5.5 trillion.[17]

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.[18]

Size of SWFs

Assets under management of SWFs amounted to $7.94 trillion as at December 24, 2020.[19]

Countries with SWFs funded by oil and gas exports, totaled $5.4 trillion as of 2020.[20] Non-commodity SWFs are typically funded by transfer of assets from official foreign exchange reserves, and in some cases from Government budget surpluses and privatization revenues. Middle Eastern and Asian countries account for 77% of all SWFs.

Largest sovereign wealth funds

Country or Region Abbreviation Fund Assets,
billions USD[21]
Inception Origin
NorwayGPF-GGovernment Pension Fund1,1221990Oil & Gas
ChinaCICChina Investment Corporation1,0462007Non-commodity
United Arab Emirates
   
ADIAAbu Dhabi Investment Authority7101967Oil & Gas
KuwaitKIAKuwait Investment Authority5591953Oil & Gas
Saudi ArabiaSAMASAMA Foreign Holdings7081952Oil & Gas
Hong KongHKMAExchange Fund (Hong Kong)5411993Non-commodity
ChinaSAFESAFE Investment Company7431997Non-commodity
SingaporeGICGIC Private Limited4881981Non-commodity
QatarQIAQatar Investment Authority3452005Oil & Gas
United Arab Emirates
   
ICDInvestment Corporation of Dubai3052006Oil & Gas
SingaporeTHTemasek Holdings2151974Non-commodity
Saudi ArabiaPIFPublic Investment Fund3251971Oil & Gas
FranceCDCCaisse des Dépôts et Consignations202[22]1816Non-commodity
RussiaNWFRussian National Wealth Fund1742008Oil & Gas
MalaysiaKNKhazanah Nasional331993Non-commodity
United Arab Emirates
   
MICMubadala Investment Company2321984Oil & Gas
South KoreaKICKorea Investment Corporation1572005Non-commodity
AustraliaFFFuture Fund[23]1412006Non-commodity
IranNDFINational Development Fund682011Oil & Gas
FranceBPIBpifrance332008Non-commodity
LibyaLIALibyan Investment Authority672006Oil & Gas
KazakhstanNFKazakhstan National Fund582012Oil & Gas
KazakhstanSKSamruk-Kazyna622008Oil & Gas
United States of America
   
APFCAlaska Permanent Fund[24]67.31976Oil & Gas
BruneiBIABrunei Investment Agency451983Oil & Gas
United States of America
   
PSFPermanent School Fund481854Land & Mineral Royalties
United Arab Emirates
   (Federal)
EIAEmirates Investment Authority632007Oil & Gas
AzerbaijanSOFAZState Oil Fund of the Republic of Azerbaijan[25]431999Oil & Gas
NorwayGPF-NGovernment Pension Fund – Norway222006Oil & Gas
AustriaÖBAGÖsterreichische Beteiligungs AG31.6[26]1967Non-commodity
New ZealandNZSFNew Zealand Superannuation Fund272003Non-commodity
TurkeyTWFTurkey Wealth Fund342017Non-commodity
United States of America
   
PUFPermanent University Fund48.41876Land & Mineral Royalties
United States of America
   
NMSICNew Mexico State Investment Council261958Oil & Gas
OmanOIAOman Investment Fund311980Oil & Gas
Timor LesteTLPFTimor-Leste Petroleum Fund182005Oil & Gas
ChileESSFEconomic and Social Stabilization Fund112007Copper
Canada
   
AHSTFAlberta Heritage Savings Trust Fund[27]121976Oil & Gas
RussiaRDIFRussian Direct Investment Fund312011Non-commodity
BahrainBMHCMumtalakat Holding Company192006Oil & Gas
ChilePRFPension Reserve Fund112006Copper
IrelandISIFIreland Strategic Investment Fund122014Non-commodity
PeruFSFFiscal Stabilization Fund51999Non-commodity
ItalyCDP EquityCassa Depositi e Prestiti Equity52011Non-commodity
United States of America
   
PWMTFPermanent Wyoming Mineral Trust Fund231974Minerals
BotswanaPFPula Fund51994Diamonds
Trinidad & TobagoHSFHeritage and Stabilization Fund62000Oil & Gas
ChinaCADFChina-Africa Development Fund102007Non-commodity
AngolaFSDEAFundo Soberano de Angola52012Oil & Gas
United States of America
   
NDLFNorth Dakota Legacy Fund8.12011Oil & Gas
IndiaNIIFNational Investment and Infrastructure Fund42015Non-commodity
ColombiaFAEPFondo de Ahorro y Estabilización Petrolera121995Oil & Gas
United States of America
   
ATFAlabama Trust Fund31985Oil & Gas
United States of America
   
SIFTOUtah-SITFO2.51983Land & Mineral Royalties
United States of America
   
IEFIBIdaho Endowment Fund Investment Board21969Land & Mineral Royalties
Nigeria
   
BDICBayelsa Development and Investment Corporation0.12012Non-commodity
NigeriaNSIANigeria Sovereign Investment Authority22011Oil & Gas
United States of America
   
LEQTFLouisiana Education Quality Trust Fund1.41986Oil & Gas
PanamaFAPFondo de Ahorro de Panama1.42012Non-commodity
United Arab Emirates
   
RIARAKIA22005Oil & Gas
BoliviaFINPROFondo para la Revolución Industrial Productiva0.42015Non-commodity
United States of America
   
CSFOregon Common School Fund21859Lands & Mineral Royalties
SenegalFONSISFonds Souverain d'Investissement Strategiques0.12012Non-commodity
PalestinePIFPalestine Investment Fund1.02003Non-commodity
KiribatiRERFRevenue Equalization Reserve Fund0.41956Phosphates
VietnamSCICState Capital Investment Corporation1.22006Non-commodity
GhanaGPFGhana Petroleum Funds0.92011Oil & Gas
GabonFGISFonds Gabonais d'Investissements Strategiques1.02012Oil & Gas
MauritaniaNFHRNational Fund for Hydrocarbon Reserves0.12006Oil & Gas
Australia
   
WAFFWestern Australian Future Fund0.82012Minerals
MongoliaFHFFuture Heritage Fund0.12011Minerals
Equatorial GuineaFRGFFonds de Réserves pour Générations Futures 0.22002Oil & Gas
Papua New GuineaPNGSWFPapua New Guinea Sovereign Wealth Fund222011Oil & Gas
TurkmenistanTSFTurkmenistan Stabilization Fund0.52008Oil & Gas
United States of America
   
WVFFWest Virginia Future Fund191997Oil & Gas
MexicoFMPFondo Mexicano del Petroleo para la Estabilizacion y el Desarrollo72000Oil & Gas
United States of AmericaFMPColorado Public School Fund Endowment Board 1.22016Lands and Minerals Royalties
United Arab Emirates
    Sharjah
SAMSharjah Asset Management Holding[28] 22008Non-Commodity
Rwanda AGDF Agaciro Development Fund[29] 0.2 2012 Non-commodity

    See also

    References

    1. "Who holds the wealth of nations?" (PDF). Central Banking Journal. 15 (4)). May 2005. Archived from the original (PDF) on 29 May 2008. Retrieved 2 September 2008.
    2. "Sovereign Funds Embrace Direct Real Asset Deals". SWF Institute. 1 August 2013.
    3. Dunkley, Dan (7 August 2014). "Sovereign-Wealth Funds Pump Near Record Amount of Cash in Deals". The Wall Street Journal. Retrieved 8 August 2014.
    4. 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. 24 May 2007.
    6. "Sovereign-Wealth Funds Went Full Steam Ahead Direct Investing in 2014". The Wall Street Journal. 6 January 2015.
    7. Chwieroth, Jeffrey M. (1 December 2014). "Fashions and Fads in Finance: The Political Foundations of Sovereign Wealth Fund Creation". International Studies Quarterly. 58 (4): 752–763. doi:10.1111/isqu.12140. ISSN 0020-8833.
    8. "Sovereign Wealth Funds: The New Hedge Fund?". The New York Times. 1 August 2007.
    9. Duncan, Gary (27 June 2007). "IMF concern over 'black box' funds of reserve rich nations". The Times. London.
    10. "Rebuilding America: The Role of Foreign Capital and Global Public Investors | Brookings Institution". Brookings.edu. 11 March 2011. Retrieved 5 October 2016.
    11. Global, IndraStra. "How Are Sovereign Wealth Fund Decisions Made?". IndraStra. ISSN 2381-3652.
    12. "Qatar to invest $35bn in U.S. over 5 years". The WorldFolio.
    13. Sovereign Wealth Funds: Generally Accepted Principles and Practices (Santiago Principles), International Working Group of Sovereign Wealth Funds, October 2008
    14. International Forum of Sovereign Wealth Funds. "Santiago Principles". Retrieved 27 September 2016.
    15. International Forum of Sovereign Wealth Funds. "About us". Retrieved 27 September 2016.
    16. International Forum of Sovereign Wealth Funds. "Our Members". Retrieved 27 September 2016.
    17. "International Forum of Sovereign Wealth Funds (IFSWF) and Hedge Fund Standards Board (HFSB) establish Mutual Observer relationship". Hedge Fund Standards Board. 4 April 2016. Retrieved 27 September 2016.
    18. "Israel natural gas wealth fund expected to begin around 2020". Reuters. 4 April 2017.
    19. "Sovereign Wealth Fund Rankings. Retrieved 2020-12-24". swfinstitute.org. Retrieved 24 December 2020.
    20. "Sovereign Wealth Fund Rankings". swfinstitute.org. Retrieved 24 December 2020.
    21. "SWFI". Retrieved 24 December 2020.
    22. "Future Fund". Future Fund. Retrieved 5 October 2016.
    23. "Alaska Permanent Fund Corporation web site". Apfc.org. Retrieved 5 October 2016.
    24. "ARDNF – Azərbaycan Respublikası Dövlət Neft Fondu – Home". oilfund.az. Retrieved 7 August 2018.
    25. "Government of Alberta – Finance (AHSTF)". Finance.alberta.ca. 1 April 2015. Retrieved 5 October 2016.
    26. https://www.swfinstitute.org/profile/598cdaa60124e9fd2d05be47. Missing or empty |title= (help)
    27. "Agaciro Development Fund". Agaciro Development Fund. 24 November 2018. Retrieved 24 November 2018.

    Further reading

    • Sovereign Wealth Fund Institute – What is a SWF?
    • Natural Resource Governance Institute & Columbia Center for Sustainable Investment "Managing the Public Trust: How to make natural resource funds work for citizens", 2014.
    • Castelli Massimiliano and Fabio Scacciavillani "The New Economics of Sovereign Wealth Funds", John Wiley & Sons, 2012
    • Saleem H. Ali and Gary Flomenhoft. "Innovating Sovereign Wealth Funds". Policy Innovations, 17 February 2011.
    • M. Nicolas J. Firzli and Vincent Bazi, World Pensions Council (WPC) Asset Owners Report: “Infrastructure Investments in an Age of Austerity: The Pension and Sovereign Funds Perspective”, USAK/JTW 30 July 2011 and Revue Analyse Financière, Q4 2011
    • M. Nicolas J. Firzli and Joshua Franzel. "Non-Federal Sovereign Wealth Funds in the United States and Canada". Revue Analyse Financière, Q3 2014
    • 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).
    • Thatcher, Mark and Vlandas, Tim (2016) "Overseas state outsiders as new sources of patient capital: government policies to welcome Sovereign Wealth Fund investment in France and Germany". Socio-Economic Review. ISSN 1475-1461
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