What is a Sovereign Wealth Fund?
A sovereign wealth fund is a state-owned investment fund that invests in assets such as real estate, stocks, bonds, private businesses, and alternative investments.
The term was invented by Andrew Rozanov in an article called “Who Holds The Wealth of Nations?” published in the Central Banking Journal in May 2005.
Sovereign wealth funds are generally funded by revenues from the export of the nation’s natural resources or from foreign reserves that the nation’s central bank has accumulated over time. The central bank will usually hold and manage the sovereign wealth fund.
Foreign reserves usually consist of stable assets such as foreign currency deposits like U.S. dollars and Euros and precious metals such as gold.
The funds may be invested through government-sponsored investment entities such as investment firms, investment trusts, or state pension funds.
The Mission of a Sovereign Wealth Fund
Governments create sovereign wealth funds when they have excess funds – not needed for immediate use in government spending or paying down government debt – that need to be invested.
The majority of sovereign wealth funds are set up by nations that derive a substantial amount of revenue from selling their natural resources to global customers. These include exporters of crude oil such as Norway and natural gas such as Qatar.
A few key reasons why nations set up sovereign wealth funds include:
Finite Natural Resources
Due to the fact that natural resources will run out and due to the global intent to shift away from fossil fuels like oil as climate change becomes a global issue, some countries seek to invest their excess funds in other asset classes to produce investment returns and diversify their economies.
They set up sovereign wealth funds for this purpose.
Reserves for Economic Downturns
After the 2008 financial crisis and the economic hardships it inflicted on many nations, many governments learned the hard way that it is essential to have reserves to weather the inevitable economic downturns.
In fact, as recently as 2020, many sovereign wealth funds including Norway’s Norges Bank Investment Management have had to tap into their funds to support their economies that have been hurt by the Covid-19 pandemic that effectively slowed down whole industries globally for almost 18 months.
Aging Population
As healthcare has improved drastically across the world, people are living longer, and are also having fewer children. As such, developed countries are seeing significant increases in the aging populations.
As the older citizens exit the workforce and enter their retirement years, productivity levels will drop, and the elder population will need to be taken care of by the active workforce and the government.
Governments are investing through sovereign wealth funds to generate income that will cover these expenses that will arise from an aging population.
Concerns about Sovereign Wealth Funds
Financial Concerns
Due to the large sizes of sovereign wealth funds, a fund can take a very large position in any asset such as a specific stock. This large investment can significantly affect the stock price for better or worse.
If the fund suddenly decides to exit its position and sell the stock, its large stock sale (immediately or over time) can cause the stock price to drop dramatically, which would hurt other smaller investors in the stock.
Due to its sizeable position in the business, a wealth fund also has the power to dictate to the management of its investee companies how they should manage the business. Smaller investors do not have this power, which may not be fair to them as the fund’s interests may not be aligned with the interests of the smaller investors.
Reputation Concerns
Some countries that have sovereign wealth funds have poor track records in human rights and freedoms in their home countries. A wealth fund of such a nation that invests in a business can cause a public outcry against that business because the business accepted an investment from that nation.
Investors and customers may boycott the business because it has this nation as an investor. This will hurt the company’s brand reputation and image.
National Security Concerns
Some countries worry that a sovereign wealth fund may invest in its strategic industries like seaports and airports to gain control of these strategically important industries for political reasons and not for financial returns.
A foreign sovereign wealth fund that controls a local strategic port or airport raises national security concerns. Some countries are explicitly rejecting investments in their local public or private strategic industries by foreign sovereign wealth funds.
The Biggest Sovereign Wealth Funds
As of December 2021, sovereign wealth funds had assets under management totaling about 8 trillion U.S. dollars.
Commodities-funded wealth funds had about $6 trillion in assets as of 2021.
As of December 2021, the world’s largest sovereign wealth fund in the world is Norway’s Norges Bank Investment Management, with assets of about 1.33 trillion U.S. dollars. It was set up in 1969 after Norway discovered oil in the North Sea.
Here is a list of the biggest sovereign wealth funds in the world (by Assets Under Management in U.S. dollars) as of December 2023:
– Norway’s Norges Bank Investment Management (Norway): $1.33 trillion
– China Investment Corporation (China): $1.22 trillion
– Abu Dhabi Investment Authority (Abu Dhabi): $829 billion
– State Administration of Foreign Exchanges (China): $817 billion
– Government of Singapore Investment Corporation (Singapore): $744 billion
– Kuwait Investment Authority (Kuwait): $693 billion
– Hong Kong Monetary Authority (Hong Kong SAR): $520 billion
– Public Investment Fund (Saudi Arabia): $480 billion
– National Council for Social Security Fund (China): $452 billion
– Qatar Investment Authority (Qatar): $366 billion
– Investment Corporation of Dubai (Dubai): $302 billion
– Temasek (Singapore): $283 billion
– Mubadala (Abu Dhabi): $243 billion
– Korea Investment Corporation (Korea): $201 billion