Sovereign Wealth Fund(SWF)

Sovereign Wealth Fund

What is Sovereign Wealth Fund?

Sovereign funds refer to financial assets or funds established and owned by sovereign governments for long-term investment; generally speaking, they are managed by specialized government investment institutions. The oil-producing countries in the Middle East had this idea very early; for example, the Kuwait KIA established in 1953, the United Arab Emirates ADIA established in 1976, and the US Alaska APRF established in 1976. Later, even non-oil-producing countries rushed to establish it, and the name might not be called a national sovereign fund.

The purpose of the establishment of the national sovereign fund is still to earn additional investment income for the country. Generally speaking, the source of funds for national sovereign funds is the surplus of natural resources and bulk material exports, such as oil, natural gas, copper, and diamonds. The second source is capital used as investment in foreign exchange deposits and export surplus. Other sources of funds are the issuance of special treasury bonds or international aid funds.

Sovereign Wealth Fund has strategy and goal

National sovereign fund investment strategies and operating methods for different purposes will also have different investment behaviors, operations, and management methods. The purpose of the establishment of sovereign wealth funds usually has the nature of strategy (whether it is a national strategy or an industrial strategy); the biggest difference between it and general mutual funds is the long-term return of the primary asset, and short-term fluctuations are not considered by national sovereign fund.

However, due to the huge differences in the national conditions and needs of various countries, the fund’s investment portfolio will have different allocations for the types of assets, currencies, countries, industries, and risk tolerances it invests in. In general national sovereign funds, early assets are mostly concentrated in fixed-rate bond instruments issued by G7 countries.

The evolution of the SWF portfolio

However, in recent years, it has focused on a global diversified asset portfolio including stocks and other risky assets, and even expanded to other alternative assets (foreign real estate, private equity investment, commodity futures, hedge funds and other non-traditional stock markets and bonds).

At present, the most popular investment target of sovereign fund investment is to use its huge capital to enter the field of venture capital, hoping to find the next unicorn like Amazon, Facebook, or Alibaba. A 2017 study by the Boston Consulting Group showed that in the past five years, digital and technology transactions accounted for nearly 30% of the total transactions funded by sovereign wealth funds, while the proportion of consumer-related product and service transactions has declined significantly.

Today, sovereign funds are one of the major holders of large blue chip stocks in major stock markets around the world. Their every move will have a great influence on the stock market. ─ ─ The top five Norwegian sovereign funds by the end of 2020, the shareholding and the weighting of the fund are: Apple 4.4%, Microsoft 3.5%, Amazon 2.9%, Alphabet 2.2%, Facebook 1.4%.

World top 10 SWF

The following are the top ten national sovereign funds in the world (as of 12/06/2020); Mainland China has three seats, and only one is a non-Asian country.

  • Norway Government Pension Fund Global, the net value of the fund is 1.122 trillion US dollars.
  • China’s China Investment Corporation (CIC) has a fund net worth of US$1.046 trillion.
  • Abu Dhabi Investment Authority, the fund’s net worth is US$580 billion.
  • Kuwait Investment Authority, the fund has a net worth of US$534 billion.
  • The Hong Kong Monetary Authority Investment Portfolio has a net value of US$528 billion.
  • Singapore Government Investment Corporation (GIC Private Limited), the fund’s net value is US$453 billion.
  • Temasek Holdings, the net value of the fund is 417 billion US dollars.
  • Saudi Arabia’s Sovereign Wealth Fund-Public Investment Fund (PIF), with a net value of US$347 billion.
  • The National Council for Social Security Fund has a net value of US$325 billion.
  • Dubai Investment Corporation, the fund has a net worth of US$305 billion.

People’s concern on SWF management

In recent years, people have begun to have doubts about the management and corporate governance of sovereign funds in various countries. The management structure and corporate governance of sovereign funds have long been a troublesome issue; Hong Kong is directly managed by the central bank, while Singapore has a special investment institution responsible for management.

In terms of corporate governance, successful sovereign wealth funds, such as the UAE Abu Dhabi Investment Authority, Singapore’s GIC, and the Norwegian Government Pension Fund, have imitated the organizational forms of the corporate world and avoided copying the structure of government administrative agencies. But supervision is a dilemma; because this is the citizen’s money, supervision is a difficult problem. The decision-making process is usually populist “politics over professional”, such as the 1Malaysia Development Berhad (1MDB) scandal in Malaysia.

Sovereign Wealth Fund

Difficulty of governance

In addition, the main concern about sovereign funds at present is that the purpose of sovereign funds may not be to make a profit, but to acquire strategic knowledge or technology. Therefore, the 23 “International Monetary Fund” member states that have sovereign funds agreed in March 2008 to formulate the “Washington Agreement” to regulate the behavior of sovereign funds.

For readers who are interested in knowing about Norwegian sovereign funds, please refer to my in-depth introduction to the column “Imitate Norwegian Pension Fund and Earn 6% per Year” written for Smart magazine (in Traditional Chinese).

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