What are Sovereign Wealth Funds?

Published by Thomas Herold in Economics, Investments, Trading

'Sovereign Wealth Funds' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Sovereign Wealth Funds are investment pools made up of foreign capital and currency reserves which the government of the country in question owns. The biggest such pools of investment belong to the few countries with a large trade surplus in their economies. This means that Norway, Singapore, the oil producing and exporting nations, and China are the principle sovereign wealth fund nations of the world. They bring in such foreign currencies as U.S. dollars in token of their substantial and valuable exports. Their respective governments then invest these currency reserves in order to obtain the maximum return they possibly can for the benefit of their nations as a whole.

The idea behind these Sovereign Wealth Funds is that the pools of money which the nation owns in foreign reserves can be invested wisely in yield-producing assets so that the economy of the country and its citizens as a group gain advantage. It is the excess central bank reserves in a net exporting nation which make these funds possible, as they accumulate from either trade surpluses or budgetary surpluses. Exports of valuable natural resources create such revenues which can be used for this kind of a fund.

The total wealth which these Sovereign Wealth Funds contain has increased by more than double since September of 2007. It grew rapidly from $3.265 trillion to fully $7 trillion by 2015. This means that the assets held by such funds have grown to be twice as much as the value for all of the global hedge funds combined. It makes these wealth funds substantial enough to move markets dramatically without ever trying to do so. During the financial crisis, they bought major stakes in troubled lenders Morgan Stanley, Citigroup, and Merrill Lynch. They were guilty of causing an asset bubble in real estate in both London and New York City. Their influence only grows apace as they evolve into increasingly sophisticated investors.

One sovereign wealth fund nation differs from the next in the kinds of permissible investments they are allowed to pursue and include. Some of the nations are worried about liquidity issues. This makes them restrict their investments to only those which are the most liquid types of public debt instruments, such as U.S. Treasuries, British Gilts, and German Bunds.

It was the rising and higher than average oil prices from 2007 to 2014 which actively encouraged the expansion of these enormous sovereign wealth funds. In that same time frame, almost 60 percent of all such assets came from the revenues of oil and gas production, sales, and distribution. Even though the 2008 Financial Crisis destroyed trillions of dollars in global asset wealth, it hardly slowed down the inexorable growth of the national wealth funds. They managed to attain the levels of $4 trillion by December of 2009 and $5 trillion by March of 2012.

There are a number of especially oil and natural gas producing nations which have developed and built up their SWF in order to provide diversification to their national income streams. The United Arab Emirates is one such model example. The overwhelming share of its national income and wealth is derived from oil exports. Because of this, the emirate dedicates part of its foreign currency reserves to a sovereign wealth fund which invests its resources in a range of diversified assets that can provide a hedge against oil-related price shocks. This fund has grown to be massive by any measure. By June of 2015, the UAE Abu Dhabi-controlled fund had increased to around $773 billion. This represented ten percent of all SWF assets at the time. In fact, these Middle Eastern oil exporting-based sovereign wealth funds comprise nearly a third of all wealth found in such national funds.

Despite the size of the UAE fund, it is not the largest on earth. The Norway Government Pension Fund proves to be the biggest in the world, with $873 billion by June of 2015. Its income is derived from the nationally owned North Sea Oil drilling operation. The plummet in oil prices and accompanying decline in the Norwegian Kroner may cause the fund to record a loss of $17 billion by the period which ended in first quarter of 2015. It is so very large that if the money from this national fund were equitably distributed to all Norwegian citizens, each of them would receive over a million Kroner in distributions.

Singapore also possesses two of the largest Sovereign Wealth Funds. Their two funds together contain $458 billion in total. They have amassed this enormous fortune because of the impressive investment and savings rates of the businesses and people in this world leading financial and trading center and city state. The Government of Singapore Investment Corporation, presently known as the GIC Private Limited fund, holds $344 billion as of 2015. Both funds are owned and operated by the government of the city state of Singapore.

China also possesses some of the largest such funds in the world. The China Investment Corporation is their largest at $747 billion. Hong Kong’s Monetary Authority owns a $442.4 billion fund as of 2015. This is utilized to support and ensure stability for the public finances of Hong Kong in general and the Hang Seng stock exchange in particular.

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The term 'Sovereign Wealth Funds' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.