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 or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports. 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 (funded by employee/employer contributions), or assets managed for the benefit of individuals.

Interesting Facts About Sovereign Wealth Funds

  • Some funds also invest indirectly in domestic industries.
  • In addition, they tend to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves.

Sovereign Wealth 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.

Common Sovereign Wealth Fund Objectives:

  • Protect & stabilize the budget and economy from excess volatility in revenues/exports
  • Diversify from non-renewable commodity exports
  • Earn greater returns than on foreign exchange reserves
  • Assist monetary authorities dissipate unwanted liquidity
  • Increase savings for future generations
  • Fund social and economical development
  • Sustainable long term capital growth for target countries
  • Political strategy

Types of Sovereign Investment Vehicles:

  • Sovereign Wealth Funds (SWFs) – example Qatar Investment Authority
  • Public Pension Funds – example CalPERS
  • State-Owned Enterprises – example Chinalco
  • Sovereign Wealth Enterprises (SWEs) – example St Martins Property
 The legal basis in which sovereign wealth funds are created varies from governmental authority and fund.

  • Constitutive Law
  • Fiscal Law
  • Constitution
  • Company Law
  • Other Laws and Regulations

SWFs generally indicate that they do not engage directly in macroeconomic policies, but with three exceptions:

  • Transfers to the budget for exceptional and targeted needs
  • The drawdown of funds for transfer to the central bank in case of exceptional balance of payments or monetary policy needs. In one case, a separate short-term fund was set aside for such purposes.
  • Stabilize domestic businesses or corporations vital to the interest of the national economy

 

Current Trends – Sovereign Wealth Funds

Size and Growth

Since 2005, at least 20 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.

oilgas What is a SWF?

Transparency & Protectionism

Some sovereign wealth funds 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.

Strategic Development Sovereign Wealth Fund (SDSWF)
It is a sovereign wealth fund that can be utilized to promote national economic or development goals. It is commonly accepted that most sovereign funds have a commercial objective which is to earn a positive risk-adjusted return on their pool of assets. There are some SWFs known to promote national economic or development goals.

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

SDSWF – Strategic Development Sovereign Wealth Fund

SIF – Strategic Investment Fund (France)

SOE – State Owned Enterprise

SWE – Sovereign Wealth Enterprise

SWF – Sovereign Wealth Fund