This article is about sovereign wealth funds, their resources, and what drives them in their investment choices. It also highlights some of the policy considerations their activities present.
Sovereign Wealth Fund
Where does Sovereign wealth fund come from?
While there are many ways, the most widely recognized sources are the surplus reserves from state-owned natural resource revenues, trade surpluses, bank reserves that may be accumulated from budgeting excesses, foreign currency operations, money from privatizations, and governmental transfer payments. In general, sovereign wealth funds usually do something. Some sovereign wealth funds are used by countries as a kind of venture capital for the private sector. Like any type of investment fund, SWFs have objectives, terms, risk tolerances, liability matches, and liquidity concerns. Some funds would like the return over the liquidity, or vice versa. According to the nature of the assets and objectives, sovereign wealth funds’ risk management can be extremely conservative to a high tolerance for risk-taking.
Characteristics:
SWF have three key characteristics:
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A sovereign wealth fund is owned by the general government, which include central government and sub-national governments.
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They include investments in foreign financial assets.
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They invest for financial objectives.
Types of sovereign wealth fund:
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Stabilization funds
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Saving or future generation funds
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Public benefit pension reserve funds
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Reserve investment funds
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Strategic Development Sovereign Wealth Funds (SDSWF)
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Foreign currency reserve assets
Examples of Sovereign Wealth Fund:
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Norway Government Pension Fund Global: $1.6 trillion
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China Investment Corporation: $1.35 trillion
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SAFE Investment Company: $1.09 trillion
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Abu Dhabi Investment Authority: $993 billion
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Public Investment Fund of Saudi Arabia: $925 billion
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Kuwait Investment Authority: 923 billion
Like any other fund, sovereign wealth funds invest in equities, debt securities, real estate, resource extraction, and other assets. While the primary goal is investment returns, SWFs may look for investments that contribute to the economy of the host country, such as infrastructure or domestic companies.
Sovereign wealth funds in strategic development
Five key roles outline the way in which strategic development sovereign wealth funds deliver for their nations.
Domestic Impact: Accelerate Direct Investments, joint ventures, nurturing new partnerships and entry into overseas infrastructure projects;
Building National Champions: Nurture leading domestic companies in strategic sectors, scale them up for positive multiplier effects on the economy;
Research, Development and Innovation: Leverage partnerships with private sector firms, foster foreign direct investment to spur R&D and innovation in portfolio companies
Drive sustainable outcomes: Integrate ESG factors into investment strategies, help build more resilient economies in support of national sustainability objectives;
Create resilient and competitive economies: Increase in-country productivity, co-investment partnerships, nurturing growth of SMEs, bridging market gaps and embracing geographic diversification.
Conclusion
The bottom line is that sovereign investors have a deep impact in spearheading sustainable economic growth and forging a better future for their nations. In as long as the sovereign wealth funds support strategic government objectives, embrace innovation, and navigate market complexities, their significance to countries will only become indispensable, fostering large-scale transformation in mature and emerging economies all over the world.