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.

HistoryEdit

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 SWFsEdit

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 purposeEdit

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 SWFsEdit

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 2008Edit

  • 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.[timeframe?][11][12]

Santiago PrinciplesEdit

There were a number of transparency indices springing out before the Santiago Principles, some more stringent than others.[citation needed] 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.[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 2010Edit

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 SWFsEdit

Assets under management of SWFs amounted to $8.8 trillion as at Sept 14, 2020.[19] There was an additional $18.2 trillion held in Public Pension Funds. Taken together, Governments have access to a pool of funds totaling $27 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, totaled $5.1 trillion as of 2020.[20] Non-oil and gas SWFs totaled $3.7 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 privatization revenues. Middle Eastern and Asian countries account for 77% of all SWFs.

Largest sovereign wealth fundsEdit

The United Arab Emirates, Kuwait, Norway, and Russia all have funds devoted to investing capital from oil and natural gas exports. Other countries with investment funds are as varied as China, Singapore, Chile, and the Pacific island nation of Kiribati.[21]

Country or Region Abbreviation Fund Assets,
billions USD[22]
Inception Origin
  Norway GPF-G Government Pension Fund 1076 1997 Oil & Gas
  China CIC China Investment Corporation 941 2007 Non-commodity
  United Arab Emirates
     Abu Dhabi
ADIA Abu Dhabi Investment Authority 710 1967 Oil & Gas
  Kuwait KIA Kuwait Investment Authority 559 1953 Oil & Gas
  Saudi Arabia SAMA SAMA Foreign Holdings 448 1952 Oil & Gas
  Hong Kong HKMA Exchange Fund (Hong Kong) 541 1993 Non-commodity
  China SAFE SAFE Investment Company 743 1997 Non-commodity
  Singapore GIC GIC Private Limited 488 1981 Non-commodity
  Qatar QIA Qatar Investment Authority 345 2005 Oil & Gas
  United Arab Emirates
     Dubai
ICD Investment Corporation of Dubai 305 2006 Oil & Gas
  Singapore TH Temasek Holdings 215 1974 Non-commodity
  Saudi Arabia PIF Public Investment Fund 325 1971 Oil & Gas
  Russia NWF Russian National Wealth Fund 174 2008 Oil & Gas
  Malaysia KN Khazanah Nasional 33 1993 Non-commodity
  United Arab Emirates
     Abu Dhabi
MIC Mubadala Investment Company 232 1984 Oil & Gas
  South Korea KIC Korea Investment Corporation 157 2005 Non-commodity
  Australia FF Future Fund[23] 141 2006 Non-commodity
  Iran NDFI National Development Fund 68 2011 Oil & Gas
  France BPI Bpifrance 33 2008 Non-commodity
  Libya LIA Libyan Investment Authority 67 2006 Oil & Gas
  Kazakhstan NF Kazakhstan National Fund 58 2012 Oil & Gas
  Kazakhstan SK Samruk-Kazyna JSC 62 2008 Oil & Gas
  United States of America
     Alaska
APFC Alaska Permanent Fund[24] 65 1976 Oil & Gas
  Brunei BIA Brunei Investment Agency 45 1983 Oil & Gas
  United States of America
     Texas
PSF Permanent School Fund 48 1854 Land & Mineral Royalties
  United Arab Emirates
   (Federal)
EIA Emirates Investment Authority 63 2007 Oil & Gas
  Azerbaijan SOFAZ State Oil Fund of the Republic of Azerbaijan[25] 43 1999 Oil & Gas
  Norway GPF-N Government Pension Fund – Norway 22 2006 Oil & Gas
  New Zealand NZSF New Zealand Superannuation Fund 27 2003 Non-commodity
  Turkey TWF Turkey Wealth Fund 34 2017 Non-commodity
  United States of America
     Texas
PUF Permanent University Fund 22 1876 Land & Mineral Royalties
  United States of America
     New Mexico
NMSIC New Mexico State Investment Council 27 1958 Oil & Gas
  Oman OIA Oman Investment Fund 31 1980 Oil & Gas
  Timor Leste TLPF Timor-Leste Petroleum Fund 18 2005 Oil & Gas
  Chile ESSF Economic and Social Stabilization Fund 11 2007 Copper
  Canada
     Alberta
AHSTF Alberta Heritage Savings Trust Fund[26] 12 1976 Oil & Gas
  Russia RDIF Russian Direct Investment Fund 31 2011 Non-commodity
  Bahrain BMHC Mumtalakat Holding Company 19 2006 Oil & Gas
  Chile PRF Pension Reserve Fund 11 2006 Copper
  Ireland ISIF Ireland Strategic Investment Fund 12 2014 Non-commodity
  Peru FSF Fiscal Stabilization Fund 5 1999 Non-commodity
  United States of America
     Wyoming
PWMTF Permanent Wyoming Mineral Trust Fund 23 1974 Minerals
  Botswana PF Pula Fund 5 1994 Diamonds
  Trinidad & Tobago HSF Heritage and Stabilization Fund 6 2000 Oil & Gas
  China CADF China-Africa Development Fund 10 2007 Non-commodity
  Angola FSDEA Fundo Soberano de Angola 5 2012 Oil & Gas
  United States of America
     North Dakota
NDLF North Dakota Legacy Fund 6 2011 Oil & Gas
  India NIIF National Investment and Infrastructure Fund 4 2015 Non-commodity
  Colombia FAEP Fondo de Ahorro y Estabilización Petrolera 12 1995 Oil & Gas
  United States of America
     Alabama
ATF Alabama Trust Fund 3 1985 Oil & Gas
  United States of America
     Utah
SIFTO Utah-SITFO 2 1983 Land & Mineral Royalties
  United States of America
     Idaho
IEFIB Idaho Endowment Fund Investment Board 2 1969 Land & Mineral Royalties
  Nigeria
   (Bayelsa State)
BDIC Bayelsa Development and Investment Corporation 0.1 2012 Non-commodity
  Nigeria NSIA Nigeria Sovereign Investment Authority 2 2011 Oil & Gas
  United States of America
     Louisiana
LEQTF Louisiana Education Quality Trust Fund 1.4 1986 Oil & Gas
  Panama FAP Fondo de Ahorro de Panama 1.4 2012 Non-commodity
  United Arab Emirates
     Ra's al Khaymah
RIA RAKIA 2 2005 Oil & Gas
  Bolivia FINPRO Fondo para la Revolución Industrial Productiva 0.4 2015 Non-commodity
  United States of America
     Oregon
CSF Oregon Common School Fund 2 1859 Lands & Mineral Royalties
  Senegal FONSIS Fonds Souverain d'Investissement Strategiques 0.1 2012 Non-commodity
  Palestine PIF Palestine Investment Fund 1.0 2003 Non-commodity
  Kiribati RERF Revenue Equalization Reserve Fund 0.4 1956 Phosphates
  Vietnam SCIC State Capital Investment Corporation 1.2 2006 Non-commodity
  Ghana GPF Ghana Petroleum Funds 0.9 2011 Oil & Gas
  Gabon FGIS Fonds Gabonais d'Investissements Strategiques 1.0 2012 Oil & Gas
  Mauritania NFHR National Fund for Hydrocarbon Reserves 0.1 2006 Oil & Gas
  Australia
     Western Australia
WAFF Western Australian Future Fund 0.8 2012 Minerals
  Mongolia FHF Future Heritage Fund 0.1 2011 Minerals
  Equatorial Guinea FRGF Fonds de Réserves pour Générations Futures 0.2 2002 Oil & Gas
  Papua New Guinea PNGSWF Papua New Guinea Sovereign Wealth Fund 22 2011 Oil & Gas
  Turkmenistan TSF Turkmenistan Stabilization Fund 0.5 2008 Oil & Gas
  United States of America
     West Virginia
WVFF West Virginia Future Fund 19 1997 Oil & Gas
  Mexico FMP Fondo Mexicano del Petroleo para la Estabilizacion y el Desarrollo 7 2000 Oil & Gas
  United Arab Emirates
     Sharjah
Shurooq Sharjah Investment and Development Authority 2 2009 Oil & Gas
  Rwanda AGDF Agaciro Development Fund[27] 0.2 2012 Non-commodity

See alsoEdit

ReferencesEdit

  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. ^ a b 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. ^ a b 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. ^ "Global SWF. Retrieved 2020-09-14". globalswf.com. Retrieved 14 September 2020.
  20. ^ "Fund Rankings | Global SWF". globalswf.com. Retrieved 14 September 2020.
  21. ^ "Sovereign Investment Funds". Emerging Index. 17 January 2010.
  22. ^ "Global SWF". Retrieved 14 September 2020.
  23. ^ "Future Fund". Future Fund. Retrieved 5 October 2016.
  24. ^ "Alaska Permanent Fund Corporation web site". Apfc.org. Retrieved 5 October 2016.
  25. ^ "ARDNF – Azərbaycan Respublikası Dövlət Neft Fondu – Home". oilfund.az. Retrieved 7 August 2018.
  26. ^ "Government of Alberta – Finance (AHSTF)". Finance.alberta.ca. 1 April 2015. Retrieved 5 October 2016.
  27. ^ "Agaciro Development Fund". Agaciro Development Fund. 24 November 2018. Retrieved 24 November 2018.

Further readingEdit

External linksEdit