A Sovereign Wealth Fund (“SWF”) is an investment vehicle owned by a national or regional government that buys, holds, and sells securities and/or assets on behalf of its citizenry in pursuit of financial and/or economic returns. This definition has evolved significantly over the years, and it now includes funds that invest abroad only (e.g., Norway’s NBIM), at home only (e.g., India’s NIIF), and both at home and abroad (e.g., Abu Dhabi’s Mubadala).
According to their investment mandate, SWFs can be classified into three different categories:
Stabilization or “rainy-day” funds that act as buffer mechanisms, benefitting from fiscal surpluses in good years and covering fiscal deficits in times of uncertainty and market shocks, e.g., Chile’s ESSF;
Savings or future generations funds that have no explicit obligations and are designed to ensure the transfer of wealth in the long term, e.g., Singapore’s GIC; and
Strategic or development funds that combine a financial goal with an economic mission, contributing to the development of the domestic economy and/or catalyzing foreign capital, e.g., Ireland’s ISIF.
It is also important to note that certain SWFs may have more than one mandate, e.g., Nigeria’s NSIA is divided into three sub-funds: a stabilization fund, a future generations fund, and an infrastructure development fund.
Today, 51% of the capital managed by SWFs comes from the revenues derived from the sale of commodities, including oil, gas, copper, phosphate, and diamonds. The other almost half comes from foreign exchange reserves, budget surpluses, issuance of securities, and proceeds from Governments’ land sales or other privatizations.
There are also several SWFs that have not been injected with significant wealth but have received stakes in national companies to manage and/or privatize them, e.g., Kazakhstan’s Samruk-Kazyna. Others are designed to manage third-party capital and to attract foreign investment into their host country, e.g., Indonesia’s INA.
As of September 2021, there are 151 SWFs in the world that manage US$ 10.2 trillion in capital. Their risk profiles and investment preferences vary significantly, but on average, 75% of their capital is invested in public markets, including bonds, stocks, and hedge funds; and 25% is in private markets, including real assets and private equity.
SWFs are long-term, passive investors who tend to shy away from control stakes and are usually only driven by financial motivations. Today, SWFs are no longer seeking to invest in multi-billion trophy assets and to hold them in their portfolio forever, but are much more dynamic, sophisticated, and flexible in their investment approach, and present a greater sensitivity towards ESG concerns and an increased focus on venture capital.
Some of the most prolific and sizeable Sovereign Wealth Funds hail from autocratic regimes. As of September 2021, the top five countries by SWF capital are China (US$ 3.0 trillion), the UAE (US$ 1.5 trillion), Norway (US$ 1.4 trillion), Singapore (US$ 1.0 trillion) and Kuwait (US$ 0.7 trillion). There is a significant concentration, and the 14 largest countries represent 95% of the global SWF industry’s AuM. Asian funds represent 44% of the industry, and those from the Middle East and North Africa (MENA), a 32%. For daily-updated numbers, go to www.globalswf.com.
The world’s largest SWF is by far Norway’s Global Pension Fund (GPF), which despite what its name may suggest, is a SWF in its own right, sourced from the revenues generated by the sale of North Sea oil, and has the mission of complementing the country’s pension system. GPF is divided into two: GPF-Global (GPFG) for investments outside of Norway, which is managed by the central bank’s investment arm Norges Bank Investment Management (NBIM), and GPF-Norway (GPFN) for the investments in Norway, which is managed by Folketrygdfondet.
For the only up-to-date and reliable ranking of the world’s largest SWFs, please visit https://globalswf.com/top-100.
The first form of a Sovereign Wealth Fund arguably emerged in Mississippi in 1817, when the state joined the Union and a Public School Trust Land was created to finance the schools. Similar models followed in Alabama, Wisconsin, Minnesota and, most notably, Texas in 1854, which formed today’s Permanent School Fund (PSF).
More recently, two Middle Eastern SWFs were created even before their nations became independent, in order to manage the revenues from oil discovered in the Gulf. The Kuwait Investment Board (KIB), in 1953, and the Abu Dhabi Investment Board (ADIB), in 1967, where formed in London under the auspices of the Bank of England, before Kuwait and the UAE became fully independent countries in 1961 and 1971. KIB and ADIB eventually became KIA and ADIA, which are now two of the world’s most influential and largest SWFs. In the Pacific, Kiribati’s Revenue Equalization Reserve Fund, founded in 1956, has also been wrongly regarded as the world’s first SWF.
The term “Sovereign Wealth Fund” was not coined until 2005, by leading economist – and Global SWF’s advisor – Andrew Rozanov in his paper “Who holds the wealth of nations?”
Sovereign Wealth Funds are not regulated. The only set of guidelines concerning the industry globally are the General Accepted Principles and Practices (GAPPs), also known as the Santiago Principles, which are not rules-based but principles-based and have not been modified since they were first written in October 2008.
Governance, transparency, legitimacy, and resilience remain key concerns. Over the years, several SWFs have been depleted or exhausted due to mismanagement and misappropriation of public funds. The most infamous case was Malaysia’s 1MDB, which was used to channel billions of dollars of taxpayers’ money into private accounts.
Due to their increasing size and influence of global financial markets, there have been heated debates about SWFs’ origin of funds, lack of transparency and political agendas. Their investments are usually scrutinized and moderated by certain agencies of the hosting economies, e.g., in the USA, the Committee on Foreign Investment in the United States (CFIUS) reviews the national security implications of foreign investments in U.S. companies or operations.
A Public Pension Fund (“PPF”) is an investment vehicle owned by a national or regional government that buys, holds, and sells securities and/or assets on behalf of its pensioners in pursuit of financial and/or economic returns. The major difference with SWFs is that PPFs have an explicit liability stream that comes from the pension contributions, and their investment horizon therefore depends on the timeline of such capital distributions.
PPFs are sometimes pension plans that receive and pay money directly to their pensioners, e.g., AustralianSuper, and sometimes investment managers that administer the capital of different pension pools, e.g., Canada’s CDPQ.
PPFs’ money can come from a wide array of pension schemes, including national pensions, e.g., Canada’s CPP, regional pensions, e.g., California’s CalPERS, occupational pensions, e.g., Netherlands’ ABP, and company pensions, e.g., Japan’s PFA. Schemes are also often split into Defined Benefit (DB), where pensioners have a guaranteed income for life, and Defined Contribution (DC) plans, which were initially designed to complement DBs.
As of September 2021, there are 265 PPFs in the world that manage US$ 20.1 trillion in capital. Their risk profiles and investment preferences vary significantly, but on average, 80% of their capital is invested in public markets, including bonds, stocks, and hedge funds; and 20% is in private markets, including real assets and private equity.
PPFs are long-term, passive investors who tend to shy away from control stakes and are usually only driven by financial motivations. Today, PPFs are no longer seeking to invest in multi-billion trophy assets and to hold them in their portfolio forever, but are much more dynamic, sophisticated, and flexible in their investment approach.
Some of the most prolific and sizeable Public Pension Funds hail from developed markets. As of September 2021, the top five countries by PPF capital are the USA (US$ 9.8 trillion), Japan (US$ 2.1 trillion), Canada (US$ 1.6 trillion), Netherlands (US$ 1.3 trillion) and South Korea (US$ 0.9 trillion). There is a significant concentration, and the 12 largest countries represent 90% of the global PPF industry’s AuM. North American funds represent 57% of the industry, and those from Asia, a 21%. For daily-updated numbers, go to www.globalswf.com.
The world’s largest PPF is by far Japan’s Government Pension Investment Fund (GIPF), which manages the excess of pension capital not covered by Kosei-nenkin (Employees’ Pension Schemes) and Kyosai-nenkin (Mutual Aid Associations). GPIF’s asset under management (AuM) are forecasted to reach US$ 4.3 trillion in 2079.
For the only up-to-date and reliable ranking of the world’s largest PPFs, please visit https://globalswf.com/top-100.
Both SWFs and PPFs are large, (usually) internationally active investment funds with relatively small staffs that deploy capital in search of commercial returns. Both types of funds are subject to state ownership and control, which has both costs and benefits, and can invest in private markets including real assets and private equity.
While an important share of SWFs hail from emerging markets and autocratic regimes (which makes them heavily scrutinized), PPFs are usually from democratic and developed economies. The most crucial and obvious difference between them though, is that PPFs have an explicit stream of pension liabilities, and SWFs do not.
Together, we refer to both groups as State-Owned Investors (SOIs), Sovereign Investors, or Sovereign Funds.
Since 2020, Global SWF undertakes an annual review of the best practices of the world’s Top 100 funds. The GSR Scorecard is comprised of 25 elements – 10 of which are associated to governance and transparency, 10 to sustainability and responsible investing, and five to resilience and legitimacy – which are determined binarily (Yes / No) for each of the funds. The scores are given by Global SWF’s team based on publicly available information only and may be reviewed and challenged by the funds themselves at any time.
Such quantitative assessment has become a critical tool of analysis of SOIs’ efforts, serving as a reality check for asset owners to measure and improve best practices, and enabling managers and other relevant market participants to identify important aspects of their partners. The latest report is at https://bit.ly/gsrscoreboard2021.