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Sovereign Wealth Funds. Sovereign wealth fund (SWF) is a fund owned by a state composed of financial assets such as stocks, bonds, property or other financial instruments.
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Sovereign wealth fund (SWF) is a fund owned by a state composed of financial assets such as stocks, bonds, property or other financial instruments.
Sovereign wealth funds are, broadly defined, entities that can manage the national savings for the purposes of investment. These are assets of the sovereign nations which are typically (but not necessarily) held in domestic and different reserve currencies such as the dollar, euro and yen. The names attributed to the management entities may include central banks, official investment companies, state pension funds, sovereign oil funds and so on.
There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. The former can be characterized as maximizing long term return, with the latter serving short term currency stabilization and liquidity management.
Nature and PurposeSWFs are typically created when governments have budgetary surpluses and have little or no international debt. This excess liquidity is not always possible or desirable to hold as money or to channel it into consumption immediately. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds.
Other reasons for creating SWFs may be economical, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf War managed excess reserves above the level needed for currency reserves (although many central banks do that now). The Government of Singapore Investment Corporation is partially the expression of a desire to create an international finance center. The Korean Investment Corporation has since been similarly managed.
There are several reasons why the growth of sovereign wealth funds is attracting close attention. • First, as this asset pool continues to grow in size and importance, so does its potential impact on various asset markets. • Second, and relatedly, some critics worry that foreign investment by sovereign wealth funds raises national security concerns because the purpose of the investment might be to secure control of strategically-important industries for political rather than financial gain. • Third, sovereign wealth funds are not nearly as homogeneous as central banks or public pension funds. • Fourth, are central bank reserve managers – at least those among them who have accumulated massive foreign exchange reserves in recent years – starting to act more like sovereign wealth managers? What precisely is the difference between the two, and how can we expect them to develop and relate to one another in the future?
At the end of 2006, estimates on the investments held by SWFs vary between one and seven trillion US dollars, depending on how widely the net is cast (foreign exchange reserves account for around $4.5 trillion of the total). According to the Economist SWFs market capitalization is about $2.5 trillion.
ADIA (Abu Dhabi Investment Authority) is named as one of the “Super Seven” funds, all of which have assets over $100 billion. These funds are: The Government Pension Fund of Norway ($322 billion); Government of Singapore Investment Corporation ($330 billion); Kuwait Investment Authority ($213 billion); China Investment Corporation ($200 billion); The Stabilisation Fund of the Russian Federation ($127.5 billion); and Singapore’s Temasek Holdings ($108 billion).
