Annex 2 – What are sovereign wealth funds?

The Sovereign Wealth Fund Institute of Las Vegas, USA defines SWF as “a state-owned investment fund or entity that is commonly established from balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from resource exports”. That leaves out central banks’ reserves for balance-of-payments or monetary-policy, state-owned enterprises (SOEs), pension funds for government employees and assets to benefit individuals.

The term “sovereign wealth fund” has been around since 2005 when it was invented by Andrew Rozanov, then of State Street Global Advisors. However, there have been natural-resource funds since 1876 and the first SWF was the Kuwait Investment Fund in 1953.

Since then they have grown fast – total assets under management were $895bn in 2005, while an October 2014 count by the SWF Institute puts them at $6.8 trillion. Global giants are Norway’s Government Pension Fund with $893bn and Abu Dhabi Investment Authority with $773bn. Four of the top nine funds are Chinese, with $1.8 trillion between them. (Global stock market capitalization in 2013 was $62.6 trillion). The funds hit the global news agenda after the 2008 financial crisis as high oil prices helped increase some states’ spending power and funds snapped up high-profile investments including top financial firms.

SWFs have objectives such as helping to smooth expenditures when oil, gas and diamond revenues are volatile and helping governments set realistic budgets. They help governments avoid overspend when prices are high, for instance on legacy projects such as grandiose concert halls, or running out of cash when oil prices fall, leaving projects such as roads half-built. Funds can help governments save for the future in good years, especially useful if the governments are not good at spending well. Funds can also help countries ward off “Dutch disease” by keeping some revenues in foreign currencies.

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