What is a SWF?
About Sovereign Wealth Funds
What is a Sovereign Wealth Fund?
A Sovereign Wealth Fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, real estate, or other financial instruments funded by foreign exchange assets. These assets can include: balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports. Sovereign Wealth Funds can be structured as a fund, pool, or corporation. The definition of sovereign wealth fund exclude, among other things, foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes, state-owned enterprises (SOEs) in the traditional sense, government-employee pension funds, or assets managed for the benefit of individuals.
Some funds also invest indirectly in domestic state-owned enterprises. In addition, they tend to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves.
Funds may have their origin in:
Commodities – Created through commodity exports, either taxed or owned by the government.
Non Commodities – Usually created through transfers of assets from official foreign exchange reserves.
| SWFs: Nature & Purpose
Each fund has its own unique reason for its creation; furthermore, all funds have their own objectives. Some Fund Objectives:
Types of Sovereign Investments Vehicles:
|
The legal basis in which sovereign wealth funds are created varies from country and fund.
SWFs generally indicate that they do not engage directly in macroeconomic policies, but with two exceptions:
Source: International Working Group of Sovereign Wealth Funds |
Current Trends
Size and Growth
-
Since 2005, at least 17 sovereign wealth funds have been created. As other countries grow their currency reserves they will seek greater returns. Their growth has also been skyrocketed by rising commodity prices especially oil & gas, especially between the years of 2003 – 2008.
Transparency & Protectionism
Has anyone ever heard of UAE’s Dubai World’s Port Deal or China’s CNOOC’s bid for Unocal?
Or how about the latest foreign bailout for the largest US Financial Institutions such as Citigroup, Morgan Stanley, and Merrill Lynch?
Many SWFs are non-transparent, meaning they do not report their holdings or strategies to the Public. Some experts say they are passive investments, while others fear they are a matter of national security. These are causes for concern for many people, investors, and governments; and will eventually fuel the fires of protectionism.
Learn more about the Linaburg Maduell Transparency Index
Sovereign Wealth Enterprise (SWE)
-
Another interesting trend is the development of sovereign wealth enterprises (SWE) which are investment vehicles that are owned and controlled by sovereign wealth funds. These vehicles allow greater flexibility for SWFs.
Common List of Abbreviations
-
ADIA – Abu Dhabi Investment Authority
CalPERS – California Public Employees Retirement System
CIC – China Investment Corporation
GCC – Gulf Cooperation Council
GIC – Singapore’s Government Investment Corporation
GPF – Norway’s Government Pension Fund – Global
HSF – Trinidad and Tobago – Heritage and Stabilization Fund
KIA – Kuwait Investment Authority
KIC – Korea Investment Corporation
LIA – Libyan Investment Authority
LMTI – Linaburg Maduell Transparency Index
NWF – National Welfare Fund (Russia)
QIA – Qatar Investment Authority
SAFE – State Administration of Foreign Exchange (China)
SAMA – Saudi Arabian Monetary Agency
SIF – Strategic Investment Fund (France)
SWE – Sovereign Wealth Enterprise
SWF – Sovereign Wealth Fund
