About SWFs
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. 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:
- 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
3 Types of Sovereign Investments Vehicles:
- Sovereign Wealth Funds (SWFs) - example (Qatar Investment Authority)
- Public Pension Schemes - example (CalPERS)
- State Owned Enterprises - example (Chinalco)
Current Trends
Size and Growth
Since 2005, 12 SWFs have been created and the US Department of Treasury estimates they control around $2.5 trillion. 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.
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?
Most 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.
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