Friday, September 17, 2010

Sovereign Wealth Fund

From Wikipedia, the free encyclopedia
 
 
 
A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial firms including Citigroup, Morgan Stanley, and Merrill Lynch. These firms needed a cash infusion due to losses resulting from mismanagement and the subprime mortgage crisis.

Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its management of a nation's banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings which are invested by various entities for the purposes of investment return, and which may not have a significant role in fiscal management.
The accumulated funds may have their origin in, or may represent foreign currency deposits, gold, SDRs and International Monetary Fund reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations which are typically held in domestic and different reserve currencies such as the dollar, euro and yen. Such investment management entities may be set up as official investment companies, state pension funds, or sovereign oil funds, among others.

There have been attempts to distinguish funds held by sovereign entities from foreign exchange reserves held by central banks. Sovereign wealth funds can be characterized as maximizing long term return, with foreign exchange reserves serving short term currency stabilization and liquidity management. Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover it is widely believed most have diversified hugely into assets other than short term, highly liquid monetary ones, though almost no data is available to back up this assertion. Some central banks have even begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like Overnight Interest rate swaps).[citation needed]

Contents

History

The term sovereign wealth fund was first used in 2005 by Andrew Rozanov in an article entitled, 'Who holds the wealth of nations?' in Central Banking journal[1]. The previous edition of the journal described the shift from traditional reserve management to sovereign wealth management; subsequently the term gained widespread use as the spending power of global officialdom has rocketed upwards.

Early SWFs

Sovereign wealth funds have been around for decades but since 2000, the number of sovereign wealth funds has increased dramatically. The first SWF was the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait even gained independence from the United Kingdom. According to many estimates, Kuwait's fund is now worth approximately $250 billion.
Another of the first registered SWFs is the Revenue Equalization Reserve Fund of Kiribati. Created in 1956 when the British administration of the Gilbert Islands in Micronesia put a levy on the export of phosphates used in fertilizer, the fund has since then grown to $520m [2].

Nature and purpose

SWFs 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 into immediate consumption. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. In such countries the main reason for creating a SWF is because of the properties of resource revenue: high volatility of resource prices, unpredictability of extraction and exhaustibility of resources.
There are two types of funds: saving funds and stabilization funds. Stabilization SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles' adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations. One such fund is the Government Pension Fund of Norway. It is believed that SWFs in resource rich countries can help avoid resource curse, but the literature on this question is controversial. Governments may be able to spend the money immediately, but risk causing the economy to overheat, e.g. in Hugo Chávez's Venezuela or Shah-era Iran. In such circumstances, saving the money to spend during a period of low inflation is often desirable.
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 and Temasek Holdings are partially the expression of a desire to bolster Singapore's standing as an international financial centre. The Korea Investment Corporation has since been similarly managed.

Concerns about SWFs

There are several reasons why the growth of sovereign wealth funds is attracting close attention.
  • As this asset pool continues to expand in size and importance, so does its potential impact on various asset markets.
  • Some countries worry that foreign investment by SWFs 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.[3] [4] These concerns have led the EU to reconsider whether to allow its members to use 'golden shares' to block certain foreign acquisitions.[5] This strategy has largely been excluded as a viable option by the EU, for fear it would give rise to a resurgence in international protectionism. In the U.S., these concerns are addressed by the Exon-Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, § 5021, 102 Stat. 1107, 1426 (codified as amended at 50 U.S.C. app. § 2170 (2000)), as administered by the Committee on Foreign Investment in the United States (CFIUS).
  • Their inadequate transparency is a concern for investors and regulators. For example, size and source of funds, investment goals, internal checks and balances, disclosure of relationships and holdings in private equity funds. Many of these concerns have been addressed by the IMF and its Santiago Principles, which set out common standards regarding transparency, independence and governance.[6]
  • SWFs are not nearly as homogeneous as central banks or public pension funds. However they do have a number of interesting and unique characteristics in common. These make them a distinct and potentially valuable tool for achieving certain public policy and macroeconomic goals.[citation needed]

Meetings & latest developments

  • On August 20, 2008, Germany approved a law that requires parliamentary approval for foreign investments that endanger national interests. Specifically, it will affect acquisitions of more than 25% of a German company's voting shares by non-European investors; but the economics minister, Michael Glos, has pledged that investment reviews would be "extremely rare".[8] The legislation is loosely modelled on a similar one by the U.S. Committee on Foreign Investments.
  • On September 2-3, 2008, at a summit in Chile, the International Working Group of Sovereign Wealth Funds - consisting of the world's main SWFs - agreed to a voluntary code of conduct first drafted by IMF. They also considered a standing committee to represent them in international policy debates.[9] The 24 principles in the draft (the Santiago Principles) were made public after being presented to the IMF governing council on October 11, 2008.
  • The Brazilian Government announced the creation of its own sovereign fund. A document signed on December 24, 2008, by Brazil's president Luis Inacio Lula da Silva officially introduced the fund (Fundo Soberano Nacional) that would have an initial goal of reaching $20 billion dollars.
The OECD is currently drafting a code of conduct for recipient countries of SWF investments.

Size of SWFs

Assets under management of SWFs fell 3% in 2009 to $3.8 trillion.[10] The underlying value of SWFs’ portfolios probably increased by 15% in 2009 if negative positions on equity market investments at the end of the previous year are taken into account. There was an additional $6.5 trillion held in other sovereign investment vehicles, such as pension reserve funds, development funds and state-owned corporations’ funds and $6.1 trillion in other official foreign exchange reserves.
Countries with SWFs funded by commodities’ exports, primarily oil and gas exports, totalled $2.5 trillion at the end of 2009. Non-commodity SWFs totalled $1.3 trillion and are projected to increase their 34% share of assets in 2009 to 38% by 2012. Non-commodity SWFs are typically funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses and privatisation revenue. Asian countries account for the bulk of such funds.
An important point to note is the SWF to Foreign Reserve Exchange Ratio which shows the proportion a government has invested in investments relative to currency reserves. According to the SWF Institute, most oil producing nations in the gulf have a higher SWF to Foreign Exchange Ratio - for example, the Qatar Investment Authority (5.89x) compared to the China Investment Corporation (.12x) - reflecting a more aggressive stance to seek higher returns.[citation needed]

Largest sovereign wealth funds

Country↓ Abbreviation↓ Fund↓ Assets $Billion↓ Inception↓ Origin↓
 United Arab Emirates
    Abu Dhabi
ADIA Abu Dhabi Investment Authority &0000000000000627000000627 1976 Oil
 Norway GPF Government Pension Fund - Global &0000000000000443000000443 1990 Oil
 Saudi Arabia SAMA SAMA Foreign Holdings &0000000000000415000000415 n/a Oil
 China SAFE SAFE Investment Company &0000000000000347100000347.1** 1997 Non-commodity
 China CIC China Investment Corporation &0000000000000332399999332.4 2007 Non-commodity
 Singapore GIC Government of Singapore Investment Corporation &0000000000000247500000247.5 1981 Non-commodity
 China
    Hong Kong
HKMA Hong Kong Monetary Authority Investment Portfolio &0000000000000227599999227.6 1993 Non-commodity
 Kuwait KIA Kuwait Investment Authority &0000000000000202800000202.8 1953 Oil
 China NSSF National Social Security Fund &0000000000000146500000146.5 2000 Non-commodity
 Russia RNWF National Welfare Fund &0000000000000142500000142.5* 2008 Oil
 Singapore TH Temasek Holdings &0000000000000133000000133 1974 Non-commodity
 Libya LIA Libyan Investment Authority &000000000000007000000070 2006 Oil
 Qatar QIA Qatar Investment Authority &000000000000006500000065 2003 Oil
 Australia AFF Australian Future Fund &000000000000005910000059.1 2004 Non-commodity
 Algeria RRF Revenue Regulation Fund &000000000000005479999954.8 2000 Oil
 Kazakhstan KNF Kazakhstan National Fund &000000000000003800000038 2000 Oil
 United States
    Alaska
APF Alaska Permanent Fund &000000000000003550000035.5 1976 Oil
 Ireland NPRF National Pensions Reserve Fund &000000000000003300000033 2001 Non-commodity
 South Korea KIC Korea Investment Corporation &000000000000003030000030.3 2005 Non-commodity
 Brunei BIA Brunei Investment Agency &000000000000003000000030 1983 Oil
 France SIF Strategic Investment Fund &000000000000002800000028 2008 Non-commodity
 Malaysia KN Khazanah Nasional &000000000000002500000025 1993 Non-commodity
 Iran OSF Oil Stabilisation Fund &000000000000002300000023 1999 Oil
 Chile SESF Social and Economic Stabilization Fund &000000000000002180000021.8 1985 Copper
 United Arab Emirates
    Dubai
ICD Investment Corporation of Dubai &000000000000001960000019.6 2006 Oil
 Azerbaijan SOF State Oil Fund &000000000000001490000014.9 1999 Oil
 United Arab Emirates
    Abu Dhabi
IPIC International Petroleum Investment Company &000000000000001400000014 1984 Oil
 Canada
    Alberta
AHF Alberta's Heritage Fund &000000000000001380000013.8 1976 Oil
 United Arab Emirates
    Abu Dhabi
MDC Mubadala Development Company &000000000000001330000013.3 2002 Oil
 United States
    New Mexico
NMSIOT New Mexico State Investment Office Trust &000000000000001290000012.9 1958 Non-commodity
 New Zealand NZSF New Zealand Superannuation Fund &000000000000001209999912.1 2003 Non-commodity
 Bahrain MHC Mumtalakat Holding Company &00000000000000090999999.1 2006 Oil
 Brazil SFB Sovereign Fund of Brazil &00000000000000085999998.6 2009 Non-commodity
 Oman SGRF State General Reserve Fund &00000000000000081999998.2 1980 Oil & Gas
 Botswana PF Pula Fund &00000000000000069000006.9 1996 Diamonds & Minerals
 East Timor TLPF Timor-Leste Petroleum Fund &00000000000000062999996.3 2005 Oil & Gas
 Saudi Arabia PIF Public Investment Fund &00000000000000052999995.3 2008 Oil
 China CADF China-Africa Development Fund &00000000000000050000005.0 2007 Non-commodity
 United States
    Wyoming
PWMTF Permanent Wyoming Mineral Trust Fund &00000000000000036000003.6 1974 Minerals
 Trinidad and Tobago HSF Heritage and Stabilization Fund &00000000000000028999992.9 2000 Oil
 United Arab Emirates
    Ra’s al Khaymah
RIA RAK Investment Authority &00000000000000011999991.2 2005 Oil
 Venezuela FEM FEM &00000000000000008000000.8 1998 Oil
 Vietnam SCIC State Capital Investment Corporation &00000000000000005000000.5 2006 Non-commodity
 Nigeria ECA Excess Crude Account &00000000000000005000000.5 2004 Oil
 Kiribati RERF Revenue Equalization Reserve Fund &00000000000000004000000.4 1956 Phosphates
 Indonesia GIU Government Investment Unit &00000000000000003000000.3 2006 Non-commodity
 Mauritania NFHR National Fund for Hydrocarbon Reserves &00000000000000003000000.3 2006 Oil & Gas
 United Arab Emirates
   (Federal)
EIA Emirates Investment Authority X 2007 Oil
 Oman OIF Oman Investment Fund X 2006 Oil
 United Arab Emirates
    Abu Dhabi
ADIC Abu Dhabi Investment Council X 2007 Oil
* This includes the oil stabilization fund of Russia. ** This number is a best guess estimation.

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