Investment Articles

Sovereign Wealth Funds (SWF) are owned and managed by governments or central banks of various countries around the world to invest their trade surplus globally, usually on a long term basis. They are funded by trade surplus of international trade, foreign currency deposit, International Monetary Fund reserves and other national funds like pension funds and oil funds. With subprime crisis haunting the global financial sectors, several SWFs are being criticized for investing heavily in Citigroup, Morgan Stanley and Merill Lynch which left them gasping for cash infusion. Nevertheless, from $500 million in 1990 to $3.8 trillion in assets today, SWFs have their presence now spread across 27 countries.

Around two-third of SWFs are held by the commodity and oil exporting and gulf countries like Qatar Investment Authority, primarily with the objective of diversifying their revenue streams and reduce oil-related risk and their dependence on oil export revenue.

Over the last decade, large current account surplus enabled Russia and China to build up their sovereign funds. They seemed to have realized (after Asian financial crisis of 1997-98) that it is better to build up their own reserves instead of depending on IMF to bail them out at the time of crisis. Russia and China now manage around $450 million and $1.44 trillion in SWF assets respectively.

Industry experts predict that assets under SWFs’ control could reach $12 trillion by the end of 2015.

The two main purposes of SWFs are short term foreign currency stabilization and liquidity management. The Global Financial Stability Report (2007) classified SMFs into five groups depending on investment objectives of their respective governments. They are:

(i) Stabilization Funds

(ii) Saving Funds for Future Generation

(iii) Reserve Investment Corporate

(iv) Development Funds; and

(v) Contingent Pension Reserve Fund.

During the period of rising oil prices, SWFs of oil exporting nations drastically due to increase in their foreign exchange reserves which are then used to make strategic acquisitions across the world. On the other hand, SWFs of emerging economies like China, Singapore, Malaysia and South Korea tend to grow steadily.

Another point of difference is the SWF to Foreign Reserve Exchange ratio which is used to determine the proportion of reserves which are invested using SWFs. It has been observed that OPEC have higher ratio compared to emerging economies. Last year, ratio for Qatar Investment Authority was 5.9 times compared to China Investment Corporation’s 0.12 times.

For more information, please refer to http://understandingbasicsoffinance.blogspot.com

Geetika

Several countries are keeping their economies away from SWFs due to the concern that some investments are being diverted for political objective to acquire control of strategically important assets. It has been observed that OPECs have been diverting large pool of funds in acquiring strategic assets and investing in important sectors like infrastructure, telecom, energy and media across developed countries. After much opposition from US Congress, Abu Dhabi’s Investment Authority had to withdraw from its ADIA Dubai Port after 9/11 terror attacks.

China Investment Corporation’s $5 billion stake in Morgan Stanley and acquisition of Citigroup by Abu Dhabi Investment Authority for $7.5 billion was severely criticized after the recent subprime crisis.

Lack of transparency continues to be a major concern for nations that are experiencing increasing SWF funding in their economies. SWFs are being criticized for inadequate disclosures regarding size and source of funds, investment objectives and their holding in private equity funds. While in the U.S., these concerns are addressed by the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988, European Union preferred to avoid SWF funding. Some experts opine that such a fear is unwarranted if we compare the size of SWFs assets ($2 trillion) with the size of global investment funds assets ($20 trillion) and securities traded in dollars ($50 trillion).

IMG tried to address this concern of transparency and governance by issuing the Santiago Principles in 2007, a set of 24 voluntary principles to ensure transparency and sound governance by sovereign wealth funds (SWFs). However, very few SWFs have been following these principles seriously.

Geetika

Sovereign wealth funds are state owned collections of stocks, bonds and other assets. They are often funds which come about as a result of a significant amount of surplus cash held by the country in question. Not every country has such funds, but those that do are often saving for the future, giving future generations some form of security.

1. The largest of the sovereign wealth funds is called the Abu Dhabi Investment Authority – owned by Abu Dhabi, United Arab Emirates. Much of this country’s wealth is based on oil, a resource they still have a large quantity of. They are saving for the future however, as the oil supplies will eventually run out. The current estimated size of the fund is 627 billion dollars.

2. Saudi Arabia comes in at 431 billion dollars, with the Saudi Arabian Monetary Agency (SAMA), which was formed in 1952. The fund was set up at a time when Saudi Arabia did not have a currency of its own. It is another example of sovereign wealth funds being at the center of very forward thinking in terms of getting a country into a western way of operating as well as planning for a future where oil wealth dries up and other industries have to be developed so the people and state has a way to make money.

3. The third largest of all sovereign wealth funds is that of the Government Pension Fund of Norway, which comes in at 395 billion dollars. Again, this fund takes the nation’s considerable wealth (for a nation of 4.8 million people, this fund is truly massive) and makes investments that will see a return over a number of years. As the name suggests, this fund will provide a comfortable pension for the hard working members of the Norwegian state.

4. State Administration of Foreign Exchange, or SAFE, is owned by the People’s Republic of China and manages the country’s foreign exchange reserves, as well as regulating the foreign exchange market in that state. 347.1 billion dollars is the current value of the fund, which, like the other sovereign wealth funds, aims to solidify China’s position as a financial powerhouse and general global power.

5. The China Investment Company comes in at number 5, currently thought to be worth around 298 billion dollars. The wealth of the Chinese state is considerable and is demonstrated by the fact that there are 2 huge investment funds from this country in the top 5.

Sovereign wealth funds provide nations with a huge surplus to capitalize on this wealth – and ultimately become more wealthy.

Gino Hitshopi is highly experienced in the realm of sovereign wealth funds, having worked in the investment industry for many years. For more information please visit: http://www.preqin.com/section/infrastructure/4