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Introduction and Description of Sovereign Wealth Funds

Autor:   •  March 2, 2016  •  Essay  •  1,743 Words (7 Pages)  •  862 Views

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Introduction and Description of Sovereign Wealth Funds        

For the past fifteen years, sovereign wealth funds (SWFs) have been a topic of discussion among the financial world. Due to increasing trade surpluses in foreign countries, SWF’s presence in global financial markets has become more significant with assets under management more than doubling between 2001 and 2007, and more than doubling post-recession, 2007-2015. [8] As of right now, there are over 50 sovereign wealth funds from 45 different countries, totaling over $7 trillion in assets held under management . [8] These sovereign wealth funds have also been aiding the flailing western banks by pumping substantial amounts of capital and holding large stakes of these companies. This however, has stirred a ton of controversy on the motives behind these SWFs that has not only involved economists, but politicians as well.

  1. What are Sovereign Wealth Funds?

There is no single definition for a sovereign wealth fund but according to the US Treasury, they describe it as “A government investment fund, funded by foreign currency reserves but managed separately from official currency reserves”. [7] These pools of money are created when a country has more reserves (a surplus) than it feels necessary to have for immediate purposes, and uses the extra reserves for investing. [3] Another way a sovereign wealth fund can be created is by commodity (oil, gas, mineral) revenue from country’s export. The majority of the world’s funding source comprises from oil & gas revenue (59.5% total global funding source) but non-commodity funds are expected to reach beyond 50% of total assets. [8]

  1. What countries have SWFs and how big are they?

The ten largest funds, according to SWFI (Sovereign Wealth Fund Institute), are listed on page 8 as Table (1). [8] As you can see, sovereign wealth funds total assets are approximately $7.1 trillion, while the top 5 funds account for 50% of total holdings. [8] The Norwegian Government Pension Fund and Abu Dhabi Investment Council (United Arab Emirates) are the two largest sovereign wealth funds in the world. [8] From a regional aspect, 37% of sovereign wealth funds come from oil rich Middle Eastern Countries, listed on Table (2). [8] Asia has the largest share of total holdings with 39%, as it surpassed the Middle East during the post-recession. The remaining SWFs from excess foreign exchange reserves and other notable countries that are involved are Norway, Canada, Russia, and Australia. [4]

From a global perspective, sovereign wealth funds are not major capital holders in the global economy.  Lee Hudson Telsik from cfr.org states that, “A September 2007 article in the IMF’s journal Finance & Development summarizes that the assets controlled by SWFs worldwide are “significant but not huge” compared to the total amount of assets denominated in dollars worldwide (more than $50 trillion).” [7] While sovereign wealth funds are nearly twice the size of hedge funds (Given by Table (3)), they are considerably smaller than all of the private holdings and only a fraction compared to the $165 trillion of traded securities in the world. But when evaluating SWFs size to some of the emerging markets, it is significantly large. Simon Johnson from Finance & Development magazine states that, “The total value of traded securities in Africa, the Middle East, and emerging Europe combined is about $4 trillion; this is also roughly the size of these markets in all of Latin America”. [3] The number of SWFs will continue to grow at rapid pace and a half a dozen countries have already expressed interest in creating funds in the near future.

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