2012 Cambridge Business & Economics Conference
ISBN : 9780974211428
Małgorzata Mikita
Lazarski University
Warsaw, Poland
phone number: 696-475-334
Sovereign Wealth Funds - Global Trends
ABSTRACT
Sovering wealth funds (SWFs) are state-owned investment funds. They manage stateowned assets to achieve additional financial profits. They invest globally. The role of SWFs
in global finance has recently fundamentally increased. They have become very important
players in global financial markets.
While in general a developing of SWFs may be viewed positively, there are some
concerns about it. There is a risk that SWFs will invest to take control of strategically
important economic sectors for political reasons. It is also possible that rapid development of
SWFs market can result in the appearance of financial protectionism from host-countries.
Another drawbacks of SWFs is limited disclosure and transparency.
The main purpose of the paper is to present global trends observed in SWFs market and
discuss benefits and risks connected with them. Market size and growth trends are shown in
the article.
Over the longer run, any impact of SWFs on global financial market will depend on the
motives underlying the investment decisions of SWFs. Non-commercial motives might have
a big negative impact on global financial markets, especially on their stability.
1.INTRODUCTION
Sovereign Wealth Funds (SWFs) which manage state-owned assets to achieve
additional financial profits have recently become one of the most important international
investor groups. They have grown very fast. Their role in global finance has recently
fundamentally increased. In recent years they have proliferated thanks to bumper oil prices
as well as surging Asian exports.
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The rapid growth of SWFs market rises a lot of discussions about benefits and risks
connected with the operations of SWFs. Particularly in view of finite knowledge regarding
their operations.
The main purpose of the paper is to present global trends observed in SWFs market
and discuss benefits and risks connected with them.
The article is based on the most recent data published by the TheCityUK1.
2. CHARACTERISTICS OF SOVEREIGN WEALTH FUNDS
Sovereign wealth funds (SWFs) are special investment funds owned by the
government. They are commonly established out of balance of payments surpluses, fiscal
surpluses, proceeds of privatizations, official foreign currency operations,
and receipts
resulting from resource exports.
The definition of SWFs exclude foreign currency reserve assets held by country for
the traditional balance of payments or monetary policy purposes. Government-employee
pension funds which are funded by employee and employer contributions are not SWFs. The
term ―sovereign wealth fund - was used for the first time in 2005 by Andrew Rozanov2.
SWFs have freedom in their asset allocations decisions. They are not constrained to
certain asset classes. They can invest in foreign financial assets. Some of them invest in
domestic state-owned enterprises. They tend to prefer returns over liquidity. A concrete SWF
may have various objective of its operations. For instance it can lead to insulate the economy
against price fluctuation or save funds for future generations. Some SWFs are created to
achieve various socioeconomic goals. In most cases, SWFs have a mixture of goals that
often change over time because of economic circumstances3.
There are two types of SWFs: commodity SWFs and non-commodity SWFs.
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Commodity SWFs are funded by commodities export (mainly from oil revenue or gas
and mineral revenue). They are created mainly by oil exporting countries. The biggest role in
creating commodity SWFs plays the Gulf Cooperation Council and other Middle Eastern
countries. Apart of those are: Norway, Nigeria, Russia, Indonesia and Venezuela. Over a half
of SWF’s assets attributes to commodity funds. Commodity SWFs focus on maintaining
economic stability of a country. They insure the country against the risk of commodity price
fluctuation. Except that, they play an important role in providing incomes in the event of
long-term decline in export revenue from oil, gas, mineral or other commodities. They have a
long term approach to investment decisions. Around four-fifths of oil-exporting countries’
fund invest in overseas assets.
Non-commodity SWFs are funded mainly by transfer of financial assets from foreign
exchange reserves, privatization revenue, pension reserves and government budget surpluses.
In 2011, global official foreign exchange reserves amounted to over $ 10 trillion. A fifth of
this ($ 2.1 trillion) was held in non-commodity SWFs4. Countries with the largest surplus on
balance of payments are China and Japan. China’s foreign exchange reserve amounts $ 3.2
trillion (2011). Japan’s foreign exchange reserves amounts about $ 1.1 trillion (2011)5. 56%
of overall SWFs’ assets belongs to SWFs funded by commodities exports (mainly oil export).
44% of them belongs to non-commodity SWFs6.
3. GLOBAL TRENDS IN SWFs MARKET
SWFs are not a new phenomenon in the world. The first SWF was founded in 1953. It
was the Kuwait Investment Corporation. Of the 60 SWFs operating today, three were created
before 1970, seven – in the 1970s (during that period we could observe the rise in oil prices),
twelve – between 1980 and the mid-1990s. The bulk of SWFs were created over the past
decade (during that period we could observe the rise in oil and other commodity prices and
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built up large balances of foreign exchange reserves by some countries). Since 2005 at least
20 new SWFs have been created. The biggest number of them were created in 2009 (10 new
funds). A few new SWFs were launched in 2011, for instance – Nigerian Sovereign
Investment Authority, Italian Strategic Fund, Papua New Guinea Sovereign Wealth Fund and
Mongolia’s Fiscal Stability Fund. Nigerian Sovereign Investment Authority was launched in
May 2011 with the purpose of closing budget deficits resulting from fluctuation of oil price.
It manages revenue generated from the sale of crude oil. The purpose of the fund is to invest
mainly in domestic infrastructure projects. Italian Strategic Fund was established in July
2011. The purpose of it is to support the growth of Italian strategic firms.
The regions which play the biggest role in SWF’s market are Asia and Middle East.
They each accounted for 40% of SWF’s assets. The country which has the largest individual
share in global SWF’s funds is China. Its market share is nearly 30% of the global total. The
next positions are occupied by United Arab Emirates (accounting for 16% of the global total),
Norway (accunting for 12% of global total) and Saudi Arabia (accounting for 10% of the
global total)7. Largest SWFs are the Abu Dhabi Investment Authority from United Arab
Emirates, SAFE Investment Company (from China) and Government Pension Fund from
Norway (table 1 in the appendix).
SWFs assets are increasing at a greater pace than assets of conventional funds
(insurance funds, pension funds and mutual funds). They are very big and their liquidity is
very high. The current level of SWF’s assets is estimated at 4,8 trillion USD. It is expected
that their assets will grow to 5.2 trillion USD by the end of 20128. SWFs have grown
significantly since 2002, when their aggregate assets were a fraction of today size. Noncommodity SWFs have demonstrated more rapid growth during 1999-2011 than commodity
SWFs. However, in 2011 their assets were still lower than assets of commodity SWFs (they
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amounted to $ 2130 billion; the assets of commodity SWFs were $ 2670 billion)9 (table 2 in
the appendix).
Assets of SWFs are larger than those of the private equity funds or hedge funds10.
According to date presented by TheCityUk at the end of 2011, global assets under
management of Private Equity Funds amounted to $ 2,6 trillion and Hedge Funds – $ 1,8
trillion (table 3 in the appendix).
The top 10 funds ranked by aggregate assets control about 85 percent of total SWF
assets with oil exporters managing almost two-thirds of the total capital.
SWFs are very active on the market of direct investments. However, their activity has
decreased between 2009 and 2011. In 2011, direct investments of SWFs amounted to 59 bn
USD, in 2010 – 78 bn USD and in 2009 – 96 bn USD11 (table 4 in the appendix).
The largest recipient of SWFs’ direct investment is the financial services sector. Over
a third of assets (around $ 14 bn) were invested in this sector between 2005 and 201112 (table
5 in the appendix).
The leading destination for SWFs’ investments is the US. Between 2005 and 2011
about 19% of the overall investments (79 bn USD) were invested in the US. Second position
is occupied by the UK13. 17% of the overall investments (68 bn USD) were invested in the
UK14. Other important countries which should be mentioned were: China, France,
Switzerland, Germany and Qatar (table 6 in the appendix). Asian funds favour North
America. In 2010 they invested $ 8.6 bn in this region. Middle Eastern funds favour Europe.
In 2010 they invested $7.5 bn in Europe15.
In spite of the big amount of capital engaged in stocks, SWFs typically do not take
controlling stakes in companies. They are not interested in interfering with day-to-day
management of companies16.
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4. GLOBAL TRENDS IN SWFs MARKET – BENEFITS AND RISKS
There are some benefits and risks arising from the rapid development of SWFs market.
SWFs bring important benefits to global capital markets in terms of financial resource
allocation and increasing market liquidity. They can contribute to markets’ stabilization,
because they are a source of steady investment capital - they make long-term investment,
they are not highly leveraged. Non-commodity SWFs are an important source of liquidity on
global capital markets.
SWFs are used to create opportunities for greater human development. Some of them
finance education. We can show some examples of SWFs which finance education, for
instance: the Texas Permanent School Fund, the New Mexico land grant fund, the Shetland
Islands Oil Funds or Alberta’s Heritage Fund.
During global financial crises, SWFs played the role of saviour for Western banks in
trouble. The governments of South Korea, Singapore and Kuwait provided a lot of money to
Citigroup and Merrill Lynch which had big problems during global financial crises. SWFs
took part in stabilisation efforts on Western market17. They purchased real estate and financed
budget shortfalls.
Unfortunately, there are two groups of concerns about SWFs. The first group is connected
with the shortcomings of SWFs, the second one is connected with protectionism.
Within the first group, we can express some reservations about SWFs because of their
investment strategies. Some countries are concerned about the ability of SWFs to have
influence over the important industrial sectors. There is a risk that SWFs will invest to take
control of strategically important economic sectors for political reasons. The investment of
SWFs can be used to advance national interests of their owner. There are a lot of conflicts of
interest between different groups engaged in SWFs’ activity, for instance: between home
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country of the fund and host country, between the fund and the host government, between the
fund and the general public of the host country. It can lead to the market turmoil.
Another concern is mismanagement of investments made by SWFs. It applies particularly
to countries at a lower level of development (Vietnam, Papua New Guinea). The
mismanagement in investments hits the people from the home country of the fund. They bear
economic consequences of any mismanagement.
SWFs might distort asset prices because of non-commercially motivated sales or
purchases of securities18.
Transfers of assets from traditional central bank reserve portfolio into SWFs can result in
big rebalancing flow. It should be noted that the asset allocation made by SWFs are less risk
averse than the asset allocation made by central banks and that SWFs are less constrained by
liquidity considerations.
One of the drawbacks of SWFs is limited disclosure and transparency. To improve the
situation in this area, the International Group of Sovereign Wealth Funds was formed (in
2008). The Group published (in October 2008) the Generally Accepted Principles and
Practices for Sovereign Wealth Funds. The principles are commonly known as Santiago
Principles. They were developed under the aegis of the IMF (International Monetary Fund).
According to the Santiago Principles there should be clear and publicly disclosed policies,
procedure and
rules in relation to the SWF’s general approach to funding, spending
operations and withdrawal. The legal framework for SWFs should be sound. The policy
purpose should be clearly defined and it should be publicly disclosed. The SWFs should
prepare an annual report on their operations and performance. SWFs’ operations in host
countries should be led in compliance with all regulatory requirements of host countries 19. In
April 2009, the International Group of Sovereign Wealth Funds established the International
Forum of Sovereign Wealth Funds. The main aim of the Forum is to exchange views on
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issues connected with SWFs and facilitate an understanding of the Santiago Principles. On
July 7, 2011 the International Forum of Sovereign Wealth Funds released a report on
compliance with the Santiago Principles. The Forum took into account the legal frameworks
of SWFs, their approach to risk management and investment and their governance structure.
Except that, the stance of SWFs on transparency and disclosure was examined. The main
conclusion was that SWFs are a very heterogeneous group, they have different approaches
and applications targets and are not fully transparent.
Hovewer, they see the value of
transparency and they regard the Santiago Principles as a guide for operating practices20. The
report has some flaws. It doesn’t cover all SWFs – only 21 of 57. Some SWFs don’t want to
participate in the surveys, especially those from Iran, Libya and Equatorial Guinea)21. The
introduction of the new rules resulted in improving transparency but not eliminated all
ambiguities.
The second group of concerns is connected with protectionism. It is possible that rapid
development of SWFs market can result in the appearance of financial protectionism from
host-countries. In 2008, the Organization for Economic Cooperation and Development
(OECD) published guidance on recipient country policies towards SWFs. In the document,
the OECD underlined that recipient countries should strive to avoid protectionism. Host
countries should not set up special regimes for SWFs22.
5. CONCLUSION
SWFs are one of the symbols of increased financial globalization. The creation of them
and their development show the shifts in financial power relationships in the global economy.
The growth of SWFs reflects a redistribution of international wealth from countries that
historically have been major players in global finance (for instance: the US, Great Britain,
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France, Germany) to those that have not been seen as highly-industrialized countries (for
instance United Arab Emirates, Saudi Arabia, Singapore).
There is no doubt that SWFs are one of the most important international investors. The
assets which they mange are growing from year to year. Their activity as international
investors are growing from year to year too. Global public investors control trillions of
dollars in assets today and they are projected to maintain considerable growth over the next
years. It is expected that SWFs will continue strong capital inflows in the nearest future.
Firstly, because a lot of Asian countries (especially China) will try to build up foreign
exchange reserves. Secondly, because recovery in the global economy will affect the growth
in commodity demand from other countries.
In spite of the fact that SWFs are not the only one of the forms of cross-border
investments by public investors they generate much more concerns than other forms. We
have witnessed a divergence in opinions regarding investments by SWFs. The rapid
development of SWFs raises the question about the role of governments in the world
economy and about effectiveness of investments made by public sector. The redistribution of
capital from private to public hands implies dramatically a decision-making framework. It is
at variance with the traditional marked-oriented economy.
Over the longer run, any impact of SWFs on global financial market will depend on
the motives underlying the investment decisions of SWFs. Non-commercial motives might
have a big negative impact on global financial markets, especially on their stability. The
challenge facing the world is how best to guide SWFs investment activities and at the same
time maintain the basic principles of market-oriented economy in which private entities play
the main role.
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REFERENCES
TheCityUK (2012). Sovereign Wealth Funds, accessed February 15, 2012, [available at
http://www.thecityuk.com/research/our-work/reports-list/sovereign-wealth-funds-2012/].
2
Rozanov, A. (2005). Who Holds the Wealth of Nations?, Central Banking Journal, 52.
3
Truman E.M. (2011). Sovereign Wealth Funds: Is Asia Different?, Working Paper 11-12, Peterson
Institute for International Economics, accessed February 20, 2012, [available at
http://www.iie.com/publications/interstitial.cfm?ResearchID=1856].
4
TheCityUK (2012). Op.cit.
5
Ibidem.
6
Ibidem.
7
Ibidem.
8
Ibidem.
9
Ibidem.
10
Ibidem.
11
Ibidem.
12
Ibidem.
13
One of the example of direct investment made by SWF in the UK is the purchase of 9% of the
holding company for Thames Water by the China Investment Corporation.
14
TheCityUK (2012). Op.cit.
15
Monitor Company Group (2011). Braving the New World: Sovereign Wealth Fund Investment in
the Uncertain Times of 2010, accessed February 15, 2012, [available at
http://www.monitor.com/tabid/69/ctl/ArticleDetail/mid/705/CID/20110606072349951/CTID/1/L/enUS/Default.aspx].
16
Darell, M.,Kimbal, R., Nathoo, R., Zwirn, D., Ramachandran, V.,Goldstein, G., Moser, J. (2011).
Rebulding America: The role of foreign capital and global public investors. Governance Studies at
Brookings, accessed February 18, 2012, [available at
http://www.brookings.edu/papers/2011/0311_sovereign_wealth_funds.aspx].
17
Ibidem.
18
Beck, R., Fidora, M. (2008). The impact of Sovereign wealth funds on global financial markets.
European Central Bank, Occasional Paper Series, No 91.
19
IFSWF Members’ Experiences in the Application of the Santiago Principles. (2011).
Report prepared by IFSWF Sub-Committee 1 and the Secretariat in collaboration with the Members
of the IFSWF, accessed February 17, 2012, [available at www.ifswf.org/pst/stp070711.pdf].
20
Ibidem.
21
Bagnall S., Truman E.M., IFSWF Report on Compliance with the Santiago Principles: Admirable
but Flawed Transparency, Peterson Institute for International Economics, accessed February 15, 2012,
[available at piie.com/publications/pb/pb11-14.pdf].
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The Economist (2008). The invasion of the sovereign-wealth funds, accessed February 20, 2012,
[available at http://www.economist.com/node/10533866].
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APPENDIX
Table 1: Largest SWFs, end-2011
Funds
Abu Dhabi Investment
Assets under
management
($ BN)
627
Authority
Country
UAE-Abu
Inception
year
1976
Source
Commodity
Dhabi
SAFE Investment Company
568
China
1997
Non-commodity
Government Pension Fund -
560
Norway
1990
Commodity
SAMA Foreign Holdings
473
Audi Arabia
n/a
Commodity
China Investment Authority
410
China
2007
Non-commodity
Kuwait Investment
296
Kuwait
1953
Commodity
293
China
1993
Non-commodity
248
Singapore
1981
Non-commodity
Temasek Holdings
157
Singapore
1974
Non-commodity
National Social Security
135
China
2000
Non-commodity
National Welfare Fund
114
Russia
2008
Commodity
Tuatar Investment Authority
85
Quatar
2005
Commodity
Australia Future Fund
73
Austalia
2004
Non-commodity
Libyan Investment
70
UAE-Dubai
2006
Commodity
65
Libya
2006
Commodity
Global
Authority
Hong Kong Monetarny
Authority Investment
Portfolio
Governament of Singapore
Investment Corporation
Fund
Authority
International Petroleum
Investment Company
Others
626
Total
4,800
Source: TheCityUK (2012). Sovereign Wealth Funds, accessed Fabruary 15, 2012, [available
at http://www.thecityuk.com/research/our-work/reports-list/sovereign-wealth-funds-2012/].
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Table 2: Sovereign wealth funds assets under management ($ bn)
Year
2002
Assets of
non-commodity SWFs
371
Assets of
commodity SWFs
867
Total assets
1 238
2003
498
969
1 467
2004
650
1 224
1 874
2005
776
1 530
2 306
2006
948
2 040
2 988
2007
1 173
2 086
3 259
2008
1 656
2 484
4 140
2009
1 609
2 413
4 022
2010
1 848
2 552
4 400
2011
2 130
2 670
4 800
Source: TheCityUK (2012). Sovereign Wealth Funds, accessed Fabruary 15, 2012, [available
at http://www.thecityuk.com/research/our-work/reports-list/sovereign-wealth-funds-2012/].
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Table 3: Global assets under management of different funds ($ trillion, end-2011)
Funds
Pension funds
Assets under
management
30,0
Insurance funds
24,5
Mutual funds
23,5
Sovereign wealth funds
4,8
Private equity
2,6
Hedge funds
1,8
Source: TheCityUK (2012). Sovereign Wealth Funds, accessed Fabruary 15, 2012, [available
at http://www.thecityuk.com/research/our-work/reports-list/sovereign-wealth-funds-2012/].
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Table 4: Direct SWF investment activity ($ bn)
Year
Direct investment
2006
14,5
2007
64,1
2008
86,6
2009
96,4
2010
77,8
2011
59,2
Source: TheCityUK (2012). Sovereign Wealth Funds, accessed Fabruary 15, 2012, [available
at http://www.thecityuk.com/research/our-work/reports-list/sovereign-wealth-funds-2012/].
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Table 5: Direct SWF investment activity between 2005 and 2011 by sectors
(the largest recipient of SWFs’ direct investment)
Sectors
Financial services
Direct investment
($ bn)
135
Energy
52
Real estate
50
Infrastructure
45
Industrials
32
Materials
26
Telecommunications
22
Information technology
11
Source: TheCityUK (2012). Sovereign Wealth Funds, accessed Fabruary 15, 2012, [available
at http://www.thecityuk.com/research/our-work/reports-list/sovereign-wealth-funds-2012/].
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Table 6: Direct SWF investment activity between 2005 and 2011 by country
(the largest recipient of SWFs’ direct investment)
Country
Direct investment
($ bn)
US
76
UK
68
China
38
France
28
Switzerland
27
Germany
26
Qatar
15
Others
121
Source: TheCityUK (2012). Sovereign Wealth Funds, accessed Fabruary 15, 2012, [available
at http://www.thecityuk.com/research/our-work/reports-list/sovereign-wealth-funds-2012/].
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