What is a Sovereign Wealth Fund?
What is a Sovereign Wealth Fund (SWF)?
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 excludes, 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 may invest indirectly in domestic industries
- 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
Classifications of Sovereign Wealth Funds
Traditional Classification of Sovereign Wealth Funds
- Stabilization Funds
- Savings or Future Generations Funds
- Pension Reserve Funds
- Reserve Investment Funds
- Strategic Development Sovereign Wealth Funds (SDSWF)
Sovereign Investor Classifications
|Central Bank or Monetary Authority||Capital Preservation|
|Liquidity Sovereign Investor||Investment Return and Liquidity|
|Liability Sovereign Investor||Investment Return and Liability|
|Strategic Development Sovereign Wealth Funds (SDSWF)||Investment Return and Economic Development|
|Integenerational Sovereign Investor||Investment Return|
Sovereign Wealth Funds: Nature & Purpose
Each sovereign 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
- Company Law
- Other Laws and Regulations
Sovereign funds generally indicate that they do not engage directly in macroeconomic policies, but with three key 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 economy
Current Trends – Sovereign Wealth Funds
Size and Growth
Generally speaking, as other countries grow their currency reserves they will seek to diversify reserve portfolios and generate greater returns. Between the years of 2003 to 2013, sovereign wealth fund assets have skyrocketed by rising commodity prices greatly attributable to oil & gas.
Since 2005, at least 40 sovereign wealth funds have been created.
Transparency & Protectionsim
Some sovereign wealth funds are not as transparent as others. For example, one sovereign wealth fund may disclose their investment holdings in a periodic basis, while another fund keeps them private. Since 2008, sovereign wealth funds have taken strides to be more transparent, hoping to dispel fears of protectionism.
Learn more about the Linaburg Maduell Transparency Index.
Sovereign Wealth Enterprise (SWE)
Sovereign wealth enterprises (SWE) are investment vehicles that are owned and controlled by sovereign wealth funds. These subsidiaries or vehicles allow greater flexibility for sovereign funds.
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 sovereign funds known to promote national economic or development goals.
Did you know?
From the start of 2008 until the end of 2012, sovereign wealth fund assets grew by 59.1%
From 2005 to 2012, more than 32 sovereign wealth funds were created.
Key Sovereign Wealth Fund Resources
Common List of Abbreviations
|ADIA||Abu Dhabi Investment Authority|
|ADIC||Abu Dhabi Investment Council|
|CalPERS||California Public Employees Retirement System|
|CIC||China Investment Corporation|
|GCC||Gulf Cooperation Council|
|GIC||Singapore's Government Investment Corporation|
|GPFG||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|
|RDIF||Russian Direct Investment Fund|
|SAFE||State Administration of Foreign Exchange (China)|
|SAMA||Saudi Arabian Monetary Agency|
|SDSWF||Strategic Development Sovereign Wealth Fund|
|SIF||Strategic Investment Fund (France)|
|SWE||Sovereign Wealth Enterprise|
|SWF||Sovereign Wealth Fund|