What is a Sovereign Wealth Fund?

What is a Sovereign Wealth Fund (SWF)?

A Sovereign Wealth Fund (SWF) is a state-owned investment fund or entity that is commonly established from:

• Balance of payments surpluses
• Official foreign currency operations
• The proceeds of privatizations
• Governmental transfer payments
• Fiscal surpluses
• And/or receipts resulting from resource exports

The definition of sovereign wealth fund excludes, among other things:

• Foreign currency reserve assets held by monetary authorities for the traditional balance of payments or monetary policy purposes
• State-owned enterprises (SOEs) in the traditional sense
• Government-employee pension funds (funded by employee/employer contributions)
• Or assets managed for the benefit of individuals

Interesting Facts About Sovereign Wealth Funds

• Some funds may invest indirectly in domestic industries
• They tend to prefer returns over liquidity, thus they have a higher risk tolerance than traditional foreign exchange reserves

Sovereign Wealth 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

Classifications of Sovereign Wealth Funds

Traditional Classification of Sovereign Wealth Funds

• Stabilization Funds
• Savings or Future Generations Funds
• Pension Reserve Funds
• Reserve Investment Funds
• Strategic Development Sovereign Wealth Funds (SDSWF)

Sovereign Investor Classifications

Sovereign Wealth Funds: Nature & Purpose

Each sovereign fund has its own unique reason for its creation; furthermore, all funds have their own objectives.

Common Sovereign Wealth 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

Types of Sovereign Investment Vehicles:

• Sovereign Wealth Funds (SWFs) – example Qatar Investment Authority
• Public Pension Funds – example CalPERS
• State-Owned Enterprises – example Chinalco
• Sovereign Wealth Enterprises (SWEs) – example St Martins Property

The legal basis in which sovereign wealth funds are created varies from governmental authority and fund.

• Constitutive Law
• Fiscal Law
• Constitution
• Company Law
• Other Laws and Regulations

Sovereign funds generally indicate that they do not engage directly in macroeconomic policies, but with three key exceptions:

• Transfers to the budget for exceptional and targeted needs
• The drawdown of funds for transfer to the central bank in case of exceptional balance of payments or monetary policy needs. In one case, a separate short-term fund was set aside for such purposes.
• Stabilize domestic businesses or corporations vital to the interest of the economy

Current Trends – Sovereign Wealth Funds

Size and Growth

Generally speaking, as other countries grow their currency reserves they will seek to diversify reserve portfolios and generate greater returns. Between the years of 2003 to 2013, sovereign wealth fund assets have skyrocketed by rising commodity prices greatly attributable to oil & gas.

Since 2005, at least 40 sovereign wealth funds have been created.

Transparency & Protectionsim

Some sovereign wealth funds are not as transparent as others. For example, one sovereign wealth fund may disclose their investment holdings in a periodic basis, while another fund keeps them private. Since 2008, sovereign wealth funds have taken strides to be more transparent, hoping to dispel fears of protectionism.

Learn more about the Linaburg Maduell Transparency Index.

Sovereign Wealth Enterprise (SWE)

Sovereign wealth enterprises (SWE) are investment vehicles that are owned and controlled by sovereign wealth funds. These subsidiaries or vehicles allow greater flexibility for sovereign funds.

Strategic Development Sovereign Wealth Fund (SDSWF)

It is a sovereign wealth fund that can be utilized to promote national economic or development goals. It is commonly accepted that most sovereign funds have a commercial objective which is to earn a positive risk-adjusted return on their pool of assets. There are some sovereign funds known to promote national economic or development goals.

Did you know?

Key Sovereign Wealth Fund Resources

• Sovereign Wealth Fund Rankings
• Latest Events on Sovereign Wealth Funds

Common List of Abbreviations