What is a “Sovereign Wealth Fund”?
Sovereign Wealth Funds (SWFs) are state-owned collective investment vehicles that are funded by the government of a sovereign country. They are designed to provide benefits for the country’s economy and its citizens, and the money invested is usually generated by the country’s surplus reserves. These revenues could come from a range of different sources such as natural resources, bank reserves, foreign currency operations, and a budget surplus. Overall, sovereign wealth funds are invested for the long-term and have a pre-set purpose and rules for investing. For example, some SWFs have embraced the idea of sustainable investing and integrated ESG (Environmental, Social, and Governance) factors into their investment approach.
Key Learning Points
- Sovereign wealth funds are owned and funded by the government of a country
- They are designed to support a country’s economy and its citizens over the long term by serving a particular purpose, for example, strategic development, pensions, or building reserves
- The sources of funding could vary broadly – one of the most popular are natural resources such as oil and gas, but there are also others such as budget excess
- The Norway Government Pension Fund Global is by far the largest SWF with assets under management in excess of $1.3tn derived from the country’s oil industry
The Basics of Sovereign Wealth Funds
The way SWFs operate is similar to any other collective investment – they have their own objectives and strategy for achieving them, risk tolerances and liquidity requirements. SWFs are typically very large in size and depending on the objectives, their risk framework could range from conservative to more adventurous.
In terms of underlying holdings, each SWF has its own nuances which could vary depending on the fund and the country. For example, funds with liquidity concerns may invest only in very liquid public debt instruments or global large-cap equities. There are also cases, where a fund may invest directly in domestic industries to support the local economy.
Over the years, there have been concerns that politics have an influence on the SWFs, despite that reporting standards are evolving there are still some funds that are not fully transparent on their investment and governance practices.
Key Sovereign Wealth Funds
The top five largest SWFs as of 31st August 2021, according to data from the Sovereign Wealth Fund Institute are:
1. Norway Government Pension Fund Global
2. China Investment Corporation
3. Kuwait Investment Authority
4. Abu Dhabi Investment Authority
5. Hong Kong Monetary Authority Investment Portfolio
The largest SWF in the world is Norway’s Government Pension Fund Global, which was established in 1990 initially as the Government Petroleum Fund, with the idea of building a fund to hold the excess revenues from the country’s oil trade. Its diverse portfolio of investments includes equities, fixed income, and real estate.
The China Investment Corporation is the second-largest SWF that has assets under management in excess of $1.2tn. It was established by the Chinese Ministry of Finance in 2007 by issuing special bonds and its primary objective is managing a portion of the country’s foreign currency reserves.