Sovereign Wealth Funds (SWFs)

The sovereign wealth funds (SWFs) are investment instruments created by the States from the surplus revenue generated by their economic activities. The funds are designed to invest the surplus in a set of activities or areas seeking maximum profitability with minimum risk taking.

The ultimate goal is both to ensure that future generations get stable resources and to support the national economy in times of crisis.
Ignored for so long by sovereign wealth funds, insurance has started to benefit from this financial windfall.

Historical background

The first sovereign wealth fund, the «Kuwait Investment Board» was established in 1953 in Kuwait, that is 8 years before independence of the emirate. It was designed to manage the State’s surpluses generated by the oil industry.

The Kuwaiti example was followed three years later by the State of Kiribati, an archipelago in the Pacific Ocean, which would in turn create the «Revenue Equalization Reserve Fund» in 1956. As of 1974, the phenomenon has spread out to many countries in America, Asia and the Middle East, reaching Europe in 1990 with the creation of a major fund, the «Petroleum Fund» of Norway. The first investment fund created in Africa was the «Pula Fund» of Botswana whose origin dates back to 1994.

This trend, however, lost momentum with only 24 funds established between 1953 and 1999. It was not until the 2000s that the phenomenon started to revive with the development of 32 additional funds between 2000 and 2008. The 2008 financial crisis strained the global economic environment, slowing down the growth of investment funds.

Features

All sovereign wealth funds are based on the same principle, but not all have the same goals or the same areas of investment, much less the same resources.

The resources most frequently used in the creation of a fund come from oil and gas rents which represent the funding base of 45 funds against 25 funds for other sources of income (mineral and others).

At the end of May 2013, there are 70 sovereign wealth funds scattered around 46 countries. The overall assets under management of these entire funds amount to 5846.6 billion USD. This amount is increasing by 12.43% compared to 2012 when it totaled only 5 200 billion USD of assets under management.

Investment funds sectors are very diverse. In 2012 nearly three-quarters of the transactions were made in the areas of finance, real estate and raw materials.

Fund management is assessed according to specific criteria, including transparency of financing and investment. The evaluation of this transparency is carried out by means of the transparency index «Linaburg - Maduell» developed at the «Sovereign Wealth Fund Institute» by Carl Linaburg and Michael Maduell.

Points are awarded based on criteria to be followed by all sovereign funds in order to be qualified as “transparent”. The evaluation is carried out on the basis of the grid below:

Point	Index principles
+1	Fund provides history, including reason for creation, origins of wealth, and government ownership structure
+1	Fund provides up-to-date independently audited annual reports
+1	Fund provides ownership percentage of company holdings and geographic location of holdings
+1	Fund provides total portfolio market value, returns, and management compensation
+1	Fund provides guidelines in reference to ethical standards, investment policies, and enforcer of guidelines
+1	Fund provides clear strategies and objectives
+1	Fund clearly identifies subsidiaries and contact information
+1	Fund identifies external managers
+1	Fund manages its own website
+1	Fund provides main office location address and contact information (telephone and fax)

Source: Sovereign Wealth Fund Institute (www.swfinstitute.org/statistics-research/linaburg-maduell-transparency-index/)

The choice of investment sectors varies from one fund to another. However, the State fund investment policy is based on a common model:

• The search for profitability
• a moderate degree of active management
• a clear governance structure
• reliable investment practices
• collection of risks’ premiums

Top 20 funds in terms of assets under management worldwide ¹

in billions USD

Country	Sovereign wealth fund’s name	Inception	Origin	L-M index	Assets
Norway	Government Pension Fund - Global	1990	Oil	10	737.2
Saudi Arabia	SAMA Foreign Holdings	1997	Oil	4	675.9
Abu Dhabi (U.A.E)	Abu Dhabi Investment Authority	1976	Oil	5	627
China	China Investment Corporation	2007	Non-commodity	7	575.2
China	SAFE Investment Company	1997	Non-commodity	4	567.9
Kuwait	Kuwait Investment Authority	1953	Oil	6	386
Hong Kong (China)	Hong Kong Monetary Authority Investment Portofolio	1993	Non-commodity	8	326.7
Singapore	Government of Singapore Investment Corporation	1981	Non-commodity	6	285
Russia	National Welfare Fund	2008	Oil	5	175.5
Singapore	Temasek Holdings	1974	Non-commodity	10	173.3
China	National Social Security Fund	2000	Non-commodity	5	160.6
Qatar	Qatar Investment Authority	2005	Oil	5	115
Australia	Australian Future Fund	2006	Non-commodity	10	88.7
Algeria	Revenue Regulation Fund	2000	Oil & gas	-	77.2
Dubai (U.A.E)	Investment Corporation of Dubai	2006	Oil	4	70
Kazakhstan	Kazakhstan National Fund	2000	Oil	8	68.9
Abu Dhabi (U.A.E)	International Petroleum Investment Company	1984	Oil	9	65.3
Libya	Libyan Investment Authority	2006	Oil	-	65
South Korea	Korea Investment Corporation	2005	Non-commodity	9	56.6
Abu Dhabi (U.A.E)	Mubadala Development Company	2002	Oil	10	53.1
Top 20	-	-	-	-	5350.1
Rest of the world	-	-	-	-	496.5
World total	-	-	-	-	5846.6

¹ As at 31/05/2013 Source: www.swfinstitute.org/fund-rankings/

Number of funds created per decade

The different types of funds

A study by the International Monetary Fund (IMF) conducted in 2008 has allowed the classification of SWFs according to the roles and objectives assigned to them:

Stabilization funds: they are designed to ensure the public finances and the economy of a State to protect it against the volatility of commodity prices (oil, gas, etc).

Development funds: they are designed to finance socio-economic projects such as the development of emerging areas. They also aim to promote domestic industrial projects in order to boost GDP growth.

The pension reserve funds: also called reserve fund contingency plan, it is designed to help meet the financial needs related to any domestic pension fund deficit.

Saving funds for future generations: they aim to transform non-renewable assets into renewable assets to diversify the investment portfolio.

The investment reserve funds: they are entrusted with the management of the national foreign exchange reserves.

The role of funds

At the national level

At the national level, the SWFs are focused on foresight, allowing to save incomes for future generations who will no longer possess natural resources. By investing the surplus of current incomes in new activities, the States diversify their future GDP sources.

The second objective, the funds allow the States to cope with negative market fluctuations, playing, therefore, the role of economic stabilizer.

At the international level

By buying government bonds, sovereign funds carry out investments in the economies of borrowing countries. This long-term investment diversification policy provides funds with better security to hazards related to portfolio-management.

The SWFs are actively involved in financing infrastructure internationally.

SWFs and the 2008 economic crisis

The SWFs have played a major role in the management of the subprime crisis. Their liquidity reserves have been a blessing for financial institutions that seriously needed them. They injected more than 66 billion USD in six months of crisis and participated in the recapitalization of certain financial institutions in distress.

For instance, the following examples can be mentioned:

• The CIC fund (China) has acquired 9.9% of Morgan Stanley for 5 billion USD.
• The GIC fund (Singapore) disbursed 7 billion USD to acquire 4.5% of Citigroup and 10 billion USD for 9% of UBS capital.
• The Tamaesk funds (Singapore) has invested 4.4 billion USD to control 9.9% of Merrill Lynch.
• The ADIA funds (Abu Dhabi) has bought 4.5% of Citigroup for 7.5 billion USD.

It is worth noting that all of these investments were solely intended to recapitalize financial institutions that lacked liquidity and had no intention to get involved in the governance of institutions.

SWFs by geographic region

In Africa

In 2013, the African continent counts nine sovereign wealth funds, including five development funds (Botswana, Gabon, Equatorial Guinea, Ghana, Libya) and four stabilization funds (Algeria, Angola, Mauritania, Nigeria). These nine funds manage about 3 % of the world total assets of State funds, or about 156 billion USD.

With the «Revenue Stabilization Fund», Algeria holds 49.5% of African fund assets, closely followed by Libya with the «Libyan Investment Authority» controlling 41.68% of the assets of these same funds. The rest of the African assets is allocated among the funds of Botswana (4.42%), Angola (3.21%), Nigeria (0.64%), Gabon (0.26%), Mauritania (0.2%), Equatorial Guinea (0.05%) and Ghana (0.04%).

In Africa, State funds are mainly financed by oil revenues, with the exception of Botswana’s «Pula Fund» which controls the exploitation of diamonds and other minerals and Mauritania whose income is derived from iron mining.

Apart from Libya and to a lesser extent Angola which are diversifying investment sectors, the other African funds prefer investments in State bonds and other financial investments.

Major investment areas for African funds:

• tourism and hotel business (Angola, Libya)
• acquisition of financial holdings, investments in fixed income securities, government bonds, etc. (Algeria, Angola, Botswana, Gabon, Libya, Nigeria)
• trade and industry (Libya)
• real estate and infrastructure (Angola, Libya)
• agriculture (Libya)
• telecommunications (Libya)
• oil and minerals (Libya)

African sovereign funds¹

in billions USD

Country	Sovereign wealth fund’s name	Inception	Origin	Assets
Algeria	Revenue Regulation Fund	2000	Oil & gas	77.2
Libya	Libyan Investment Authority	2006	Oil	65
Botswana	Pula Fund	1994	Diamond & minerals	6.9
Angola	Fundo Soberano de Angola	2012	Oil	5
Nigeria	Nigerian Sovereign Investment Authority	2011	Oil	1
Gabon	Gabon Sovereign Wealth Fund	1998	Oil	0.4
Mauritania	National Fund for Hydrocarbon Reserves	2006	Oil & gas	0.3
Equatorial Guinea	Fund for Future Generations	2002	Oil	0.08
Ghana	Ghana Petroleum Funds	2011	Oil	0.07
Total	-	-	-	155.95

Source: www.swfinstitute.org/fund-rankings/

In the Middle East

Being the historic cradle of the first sovereign wealth fund (Kuwait 1953), the Middle East counts 14 State funds established, with the exception of Bahrain, from oil revenue surplus .

Assets held by Middle Eastern sovereign wealth funds amounted to 2014 billion USD, that is 34.45% of global assets managed by all funds.

In 2013, «SAMA Foreign Holdings» and «Abu Dhabi Investment Authority» funds are globally standing in the second and third positions with respectively 675.9 billion USD and 627 billion USD of assets under management.

In 2012, funds from the Gulf and the Middle East have carried out 40% of their operations in Europe, for a total investment of 26.3 billion USD. Nonetheless, the Old Continent is a place where these funds fear to tread because of the crises it went through, especially that of the Euro. Some experts believe that the amounts allocated to Europe were divided by five in favor of investments in the Gulf region which have increased by 70% in 2012 compared to 2011.

The new geographic distribution of the «Abu Dhabi Investment Authority Fund» (ADIA) illustrates well the path pursued by Middle Eastern countries. ADIA has reduced its potential allocation towards Europe and the developed countries. It is mainly the emerging countries which have benefited from this orientation as their investment increased from 8.5% to 13% between 2011 and 2012.

Sovereign funds in the Middle East ¹

in billions USD

Country	Sovereign wealth fund’s name	Inception	Origin	L-M Index	Assets
Saudi Arabia	SAMA Foreign Holdings	1997	Oil	4	675.9
Abu Dhab (U.A.E)	Abu Dhabi Investment Authority	1976	Oil	5	627
Kuwait	Kuwait Investment Authority	1953	Oil	6	386
Qatar	Qatar Investment Authority	2005	Oil	5	115
Dubai (U.A.E)	Investment Corporation of Dubai	2006	Oil	4	70
Abu Dhabi (U.A.E)	International Petroleum Investment Company	1984	Oil	9	65.3
Abu Dhabi (U.A.E)	Mubadala Development Company	2002	Oil	10	53.1
Oman	State General Reserve Fund	1980	Oil & gas	4	8.2
Bahrain	Mumtalakat Holding Company	2006	Non-commodity	9	7.1
Saudi Arabia	Public Investment Fund	2008	Oil	4	5.3
Ras Al Khaimah (U.A.E)	RAK Investment Authority	2005	Oil	3	1.2
U.A.E	Emirates Investment Authority	2007	Oil	3	NA
Oman	Oman Investment Fund	2006	Oil	NA	NA
Abu Dhabi (U.A.E)	Abu Dhabi Investment Council	2007	Oil	NA	NA
Total	-	-	-	-	2014.1

¹ As at 31/05/2013 NA: not available Source: www.swfinstitute.org/fund-rankings/

Worldwide

Norway hosts the most important sovereign fund © Tomasz Sieni, CC BY-SA 3.0 (modified picture)

In terms of stock, Norway has the largest sovereign wealth fund. At the end of May 2013, the «Government Pension Fund–Global» has assets under management amounting to 737.2 billion USD. Its Linaburg-Maduell transparency index is 10, the highest possible rating.

According to the geographical breakdown, the Asian funds, with total assets under management of 2190.5 billion USD in 2013, are leading the world ranking, followed by the Middle East with a total of 2014.1 billion USD. Africa manages 155.95 billion USD of funds and the rest of the world 1486.1 billion USD.

Number of funds per financing source	Breakdown of assets under management per geographic zone

Top 20 sovereign funds worldwide (excluding Africa & Middle East)¹

in billions USD

Country	Sovereign wealth fund’s name	Inception	Origin	L-M Index	Assets
Norway	Government Pension Fund - Global	1990	Oil	10	737.2
China	China Investment Corporation	2007	Non-commodity	7	575.2
China	SAFE Investment Company	1997	Non-commodity	4	567.9
Hong Kong (China)	Hong Kong Monetary Authority Investment Portofolio	1993	Non-commodity	8	326.7
Singapore	Government of Singapore Investment Corporation	1981	Non-commodity	6	285
Russia	National Welfare Fund	2008	Oil	5	175.5
Singapore	Temasek Holdings	1974	Non-commodity	10	173.3
China	National Social Security Fund	2000	Non-commodity	5	160.6
Australia	Australian Future Fund	2006	Non-commodity	10	88.7
Kazakhstan	Kazakhstan National Fund	2000	Oil	8	68.9
South Korea	Korea Investment Corporation	2005	Non-commodity	9	56.6
Iran	National Development Fund of Iran	2011	Oil & gas	5	52
Alaska (U.S.A)	Alaska Permanent Fund	1976	Oil	10	46.8
Brunei	Brunei Investment Fund	1983	Oil	1	40
Malaysia	Khazanah Nasional	1993	Non-commodity	5	39.1
Azerbaidjan	State Oil Fund	1999	Oil	10	34.1
France	Strategic Investment Fund	2008	Non-commodity	9	25.5
Texas (U.S.A)	Texas Permanent School Fund	-	Oil & others	9	25.5
Kazakhstan	National Investment Corporation	2012	Oil	NA	20
Ireland	National Pensions Reserve Fund	2001	Non-commodity	10	19.4
Rest of the world	-	-	-	-	159.8
Total	-	-	-	-	3677.8

¹ As at 31/05/2013 Source: www.swfinstitute.org/fund-rankings/

Weaknesses

Despite these weaknesses, SWFs have acquired the status of indispensable institutional investor as their contribution to the global economy is universally commended.

Despite their role in stabilizing the global economy, the SWFs are often criticized both locally and internationally.

Criticism targets the use of funds and the management mode. Some of this criticism includes:

• The lack of transparency associated with their operation.
• Their direct affiliation to the State.
• The selection and location of investment.
• the lack of control.
• the lack of communication.

Despite these weaknesses, SWFs have acquired the status of indispensable institutional investor as their contribution to the global economy is universally commended.

Examples of investments

Some investments made by the «Libyan Investment Authority»

• Acquisition of American Treasury bonds and highly rated European equities
• 355 million USD in foreign currency at HSBC and Goldman Sachs
• 10 million USD invested in BNP Paribas
• 7.5% in Juventus shares (Italian football club)
• Investment in telecom operators in Zambia, Uganda, Niger and Côte d'Ivoire
• Holding acquisition in hotels
• Equity investments in oil companies

Some investments carried out by the «Abu Dhabi Investment Authority» fund

• 7.5 billion USD to acquire 4.9% of Citigroup
• Acquisition of 2 % of Mediaset SPA
• Acquisition of 8% of EFG- Hermes Holding
• Acquisition of 9% of Apollo Management

Some investments carried out by the «China Investment Corporation» fund

• 5 billion USD to control 9.9% of Morgan Stanley
• Acquisition of 9.9% of Blackstone

Source: Les Echos dated 11/09/2013