Sovereign Wealth Fund (SWF)

These are investment funds owned & managed by sovereign nations

Author: Aviral Mathur
Aviral Mathur
Aviral Mathur
Reviewed By: Isabel Lin
Isabel Lin
Isabel Lin
Isabel Lin is a Computer Science and Economics student at Brandeis University, set to graduate in 2026. At Wall Street Oasis, Isabel progressed from a Financial Research Intern to an Editor Specialist, demonstrating her ability to analyze and communicate complex financial information effectively. In addition to her academic and professional endeavors, Isabel has achieved notable success in athletics and music, being a U.S. Junior Olympic National Gymnast and a Carnegie Hall Pianist. These accomplishments reflect her discipline and versatility, which she brings to her work in financial markets and computing.
Last Updated:September 12, 2023

What Is A Sovereign Wealth Fund (SWF)?

Sovereign Wealth Funds are investment funds owned & managed by sovereign nations that invest globally and locally in various asset classes. 

As part of its oversight of a country's financial system, a central bank may hold some social investment funds, often of significant economic and fiscal significance. 

Some are controlled by the central bank that actively manages and allocates money, while others are surpluses and extra investments by states that are not a very integral part of budgetary management.

The accumulated funds may come from various sources, including:

  • Foreign currency deposits
  • Gold
  • Special drawing rights (SDRs)
  • International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities
  • Other national assets such as:
    • Pension investments
    • Oil funds, or 
    • Other industrial and financial holdings

These are sovereign states' assets often kept in native and various reserve currencies such as the dollar, euro, pound sterling, yen, etc.

These wealth management institutions might be official investment corporations, state pension funds, or sovereign funds, among other things.

Foreign exchange reserves are used by  Social Investment Fund for short-term "currency stability" and liquidity management, while long-term profit is often maximized. 

In recent years, several central banks have substantially more reserves than they require for managing foreign exchange or liquidity. 

Furthermore, although practically no publicly available data exists to support this claim, it is commonly thought that most investors have greatly diversified into assets other than short-term, highly liquid financial ones.

Typically, an SWF has a sizable amount of funds. Each SWF has different allowed investments depending on the fund and the nation. To accommodate the requirements of their populace, countries might establish or dissolve SWFs. 

Only highly solvent credit risk instruments may be accepted as investments by funds with liquidity issues. 

These funds occasionally make direct investments in domestic businesses. Some important aspects in investing terminology might include cash, liabilities, and allotment money.

It is possible to worry about the political influence of SWFs. For example, some of the largest sovereign wealth funds are not completely open about corporate governance policies and investment choices.

Key Takeaways

  • Sovereign Wealth Funds (SWFs) are investment funds owned and managed by sovereign nations that invest globally and locally in various asset classes.

  • SWFs are established by governments with budget surpluses and little or no external debt to manage significant economic and fiscal resources.

  • The Santiago Principles are 24 international standards that guide the best ways to operate SWFs, promoting transparency, independence, and good governance.

  • The main types of SWFs include Stabilization Funds, Savings & Future Generations Funds, Reserve Funds, Pension Reserve Funds, and Strategic Development of Sovereign Wealth Funds (SDSWFs).

  • The top 5 global SWFs are the Government Pension Fund of Norway, China Investment Corporation, Abu Dhabi Investment Authority, Kuwait Investment Authority, and GIC Private Limited. These funds play crucial roles in their respective countries' economies and have significant assets under management.

Grounds for Establishing Sovereign Wealth Funds

Governments often establish SWFs when they have budget surpluses and little or no external debt. However, holding this surplus liquidity as money or using it for immediate consumption is not always feasible or desirable. 

This is particularly true when a country depends on exports of raw materials like oil, copper, or diamonds. 

The primary justification for establishing an SWF in these nations is due to the characteristics of resource revenue: significant price fluctuation and unexpected depletion of natural resources.

For uncertain times, SWFs such as war chests may be established for economic or geopolitical purposes.

Investments by these funds span a wide range of businesses and assets. By 2020, the value of nations with SWFs financed by oil and gas exports will be close to $6 trillion. 

Non-commodity SWFs are frequently financed by transferring assets from official foreign exchange reserves and occasionally through excess government spending and proceeds from privatization. Eighty percent of all SWFs come from Asia and the Middle East nations.

Santiago Principles

The Santiago Principles, also known as the Sovereign Wealth Funds: Generally Accepted Principles and Practices (GAPP), are 24 consensual international standards that guide the best ways to operate SWFs. 

They result from investors' and regulators' desire to create management standards to address the industry's lack of transparency, independence, and governance. 

The administration of social investment funds must abide by these rules to preserve a good:

  • Governance framework
  • Effective risk controls
  • Stable global financial system

Thirty funds have officially joined the IFSWF and agreed to abide by the Principles, contributing a total of US$ 6 trillion, or 80% of the world's sovereign funds' assets under management.

The 24 Santiago principles are:

  1. A strong legal system
  2. A specific mission
  3. Domestic actions synchronized with monetary and fiscal authorities
  4. Established guidelines for drawdowns
  5. Openness with the owner
  6. Clearly defined roles
  7. Governing entities chosen in a certain way
  8. Governing bodies that operate in the SWF's best interest
  9. Independence
  10. Responsibility as it is formally defined
  11. Yearly reporting
  12. Unbiased auditors
  13. Professionalism and morality
  14. Outsourcing based on rules
  15. The capacity to adhere to foreign laws
  16. Operational autonomy with respect to the owner
  17. Public accountability
  18. Specific investing guidelines
  19. Commercial in nature
  20. Restrictions on the use of confidential information
  21. Laws governing shareholder rights
  22. Successful risk management
  23. Proper performance reporting
  24. Likewise, periodical assessments guarantee adherence to the aforementioned Santiago Principles

main types of Sovereign Wealth Funds (SWF)

The fund's primary goal is to provide a positive long-term return on investment.

Additionally, the income from SWF might assist in stabilizing the budget and economy when the money from exports and other sources is highly variable. 

SWFs guarantee capital growth over the long run. 

Additionally, it will support the diversification of non-renewable commodity exports. Since SWFs invest mostly in financial instruments, they will step in to save the economy when the depletion of renewable resources brings on a revenue shortfall.

While others invest in government income, SWFs do the opposite. Budget surplus and bank reserves are two other sources. The basic objective of SWF is to protect a nation against market turmoil.

If a nation relies heavily on its environmental assets and those resources are running out, the SWF can help bolster its revenue. 

This fund can counter the negative consequences of a nation's recession and increased government expenditure.

These objectives and goals can only be achieved with the help of various Social Economic Funds.

Stabilization Fund

A stability fund is a method for saving money for either major projects or unanticipated requirements. 

Such a fund serves as a "rainy day" reserve and a way to balance off the effects of capital expenditures over time. 

Suppose the fund's balance exceeds ten percent of the community's equalized valuation. In that case, a community may appropriate up to ten percent of the tax levy from the previous year into the fund. 

Projections of the market value of all real estate, including residential, commercial, manufacturing, productive forest, other agricultural sites, farm structures, and personal property, are referred to as Equalized Community Value.  

To put money into the stability fund, the community's legislative body must vote by a majority of its members. 

To allocate funds from the fund, at least two-thirds of the community's legislative body must vote in favor.

To avoid overheating the local economy, this typically entails the purchase of debt using foreign currency.

Stabilization funds do not necessarily have to revolve around large commodity revenue. For example, national funds might instead seek to influence currency exchange rates without affecting the domestic money supply. 

Savings & Future Generations Fund

The money is put aside for investments, distinguishing reserve funds from other SWF kinds. 

The primary objective of the account is to produce cash flow for high-return, long-term investments. 

By transforming non-renewable natural resources into more sustainable and "longer-duration" financial assets, these funds are designed to foster intergenerational equity, saving, and wealth transfers. 

Along with decent payout criteria, in these types of funds, the investors can invest in some less liquid asset classes that have the potential to provide higher risk-adjusted returns.

A great example of this is Nigeria FGF

The Future Generations Fund (FGF) aims to invest in a broad portfolio of suitable growth assets to give future generations of Nigeria's citizens a strong savings basis when the country's hydrocarbon supplies run out.

The Alaska Permanent Fund in the United States and the Alberta Heritage Savings Trust Fund in Canada are examples of savings and future-generation funds producing returns.

Reserve Fund

A reserve fund is a highly liquid asset, such as a savings account, placed aside by a person or a business to cover any future expenses or debts, especially those that may arise unexpectedly. 

Less liquid assets may be utilized if the fund is geared at covering the expenses of planned improvements.

The purpose of reserve investment funds is to be used for various investing activities. 

The government keeps a portion of the earnings for a particular use, such as funding long-term initiatives or deducting unexpected capital costs. 

If managing an emergency is the goal, the buffer investment funds strategy would include highly liquid assets.

A reserve fund sets aside money to pay for anticipated, regular, and unforeseen costs that would otherwise be paid out of the general budget. 

Social Investment Fund and central banks may establish reserve funds. Although the amount of the fund may vary, the usual objective is to consistently deposit money into an account that earns interest to raise the value of the fund even when it is not being used. 

Reserve money is often held in a highly liquid account due to the possibility of unforeseen needs.

Pension Reserve Fund

A pension reserve fund is set aside to pay for a nation's pension system.

PRF aims to assist in paying government commitments due to the government's guarantee of basic old-age and disability solidarity pensions and payments to solidarity pensions due to the pension reform. 

As a result, this fund acts as a supplemental source for financing any pension emergencies in the future. 

With such a system in place, paying for pensions is no longer solely the responsibility of the government's budget. 

Despite its importance, a pension reserve fund is not present in every nation. It occurs more frequently in nations with aging populations and low fertility rates.

Pension funds have huge sums of money to invest and are key investors in public and private firms. 

They are especially essential in the stock market, which huge institutional investors dominate. The assets of the top 300 pension funds are over $6.5 trillion.

Strategic development of sovereign wealth funds (SDSWFs)

It is widely acknowledged that most SDSWF has a commercial aim to achieve a favorable hedged risk return on their infrastructure pool and development objectives. 

SDSWFs are recognized for advancing national economic or development objectives.

It is a sovereign wealth fund that can be used to further a country's financial or development objectives.

Most sovereign funds, it is widely assumed, have a commercial goal of earning a positive risk-adjusted return on their pool of assets.

Some SWFs are well-known for promoting national economic or development goals.

A Memorandum of Understanding (MoU) between the country and SDSWF is signed. As a result, select enterprises based in the nation get direct investments from the SDSWF, and these companies sell to the government of the SWF's home country. 

These businesses might potentially establish themselves in the nation where the SDSWF is based.

A firm is taken completely or directly under the management of SDSWF. The firm is in charge of the resources the SDSWF home nation needs for its economic or development needs.

Top 5 Global Sovereign Wealth Funds

This fund is a vehicle through which nations can invest excess funds in markets or other ventures.

Many countries employ sovereign wealth funds to generate revenue for the benefit of their economy and inhabitants.

The fundamental functions are diversifying the country's economy and building funds for future populations.

Every nation has a different reason for establishing this fund. For instance, the Kingdom of Saudi Arabia invests a portion of its oil earnings in a sovereign wealth fund since it relies heavily on oil exports and wants to preserve its surplus reserves from danger.

Stakeholder wealth funds have grown significantly in size and quantity. According to the SWF Institute, there are more than 91 sovereign wealth funds, and by 2020, their combined assets will be worth $8.2 trillion.

With this information, let us look at the world's top 5 Sovereign Wealth Funds and what kind of Swf they are.

1. Government Pension Fund of Norway 

The Norwegian government owns two of these funds, which comprise the Government Pension Fund of Norway.

The Oil Fund, also known as the Government Pension Fund Global, was founded in 1990 to invest excess funds from the Norwegian oil industry. 

It is the largest fund in the world, holding 1.4 percent of all publicly traded firms and more than US$1.19 trillion in assets.

It was valued at roughly $250k per Norwegian citizen as of December 2021. It also has fixed-income investing and real estate assets. However, the fund excludes a lot of businesses for social reasons.

The Government Pension Fund Norway was founded in 1967 as a national insurance fund. 

It is administered independently of the Oil Fund and is confined to domestic and Scandinavian investments; as a result, it is a significant stockholder in many big Norwegian enterprises, mostly through the Oslo Stock Exchange.

The fund's objective is to invest a portion of the significant surplus created by the Norwegian oil industry.

Primarily gets its investment from corporate tariffs but also payments for oil drilling licenses, as well as the State's Direct Financial Interest and dividends from the partially state-owned Equinor. 

Current revenue from the petroleum sector is expected to peak and then drop in the next decades.

The Petroleum Fund was founded in 1990 due to a resolution by the country's legislature to offset the consequences of a probable drop in income and to smooth out the detrimental impacts of volatile oil prices.

2. China Investment Corporation

A portion of the People's Republic of China's foreign exchange reserves is managed by the sovereign wealth fund China Investment Corporation (CIC). 

With over $200 billion in assets under management, CIC was founded in 2007. The CIC managed about US$ 1.22 trillion in assets at the end of 2022. 

It is the biggest social investment fund in China. The China Investment Corporation managed $1.2 trillion in assets as of 2021.

The People's Republic of China had US $1.4 trillion in cash reserves in 2007, which had increased to US $3.44 trillion by 2013. 

The China Investment Corporation was founded to use these reserves for the benefit of the state. 

The state-controlled Central Huijin Investment Corporation was integrated into the new firm as a wholly-owned subsidiary.

Special national debt bonds were issued to raise the CIC required. Of this bond sale, $207.91 billion in bonds were issued. In December 2007, the bonding procedure was finished. 

Lou Jiwei asserts that the CIC has to generate a daily profit of 300 million Yuan to cover operating expenses and bond interest. 

Ultimately, the State Council of the People's Republic of China is to which the administration and board of the China Investment Corporation answer. 

As seen by the board of directors' membership, which suggests "great influence on the part of China's Ministry of Finance," the China Investment Corporation is viewed as being "firmly established" in the political system.

3. Abu Dhabi Investment Authority

The Emirate of Abu Dhabi in the United Arab Emirates owns the Abu Dhabi Investment Authority (ADIA), a sovereign wealth fund established to invest money on behalf of the Emirate of Abu Dhabi government. 

It oversees the Emirate's surplus oil reserves, which are considered worth $708 billion.

The founding president of the United Arab Emirates and ruler of Abu Dhabi, Sheikh Zayed bin Sultan Al Nahyan, decided to establish the ADIA in 1976 and detach it from the government as an independent entity with its administration. 

The surpluses of the Abu Dhabi government were to be invested in various low-risk asset types. 

A government investing its reserves in something other than gold or short-term debt was unprecedented at the time. However, many nations still invest in the short-term paper as their primary approach.

ADIA invests in all worldwide markets, including:

  • Stocks
  • Fixed income
  • Government securities
  • Infrastructure
  • Real estate
  • Private equity
  • Alternative finance

ADIA's global portfolio is divided into sub-funds that each focus on a different asset class. Each asset class is covered by its fund managers and in-house analysts. As a result, almost every asset class is handled internally and externally. 

About 70% to 80% of the organization's assets are managed externally, and the fund has gotten increasingly indexed in recent years, which is surprising given its unusual asset-liability structure. 

ADIA is a prominent buyer of institutional real estate in the United States through its many sub-entities. In addition, it frequently acquires partial ownership stakes in renowned real estate managers.

4. Kuwait Investment Authority (KIA)

Kuwait's main sovereign wealth fund is managed by the Kuwait Investment Authority (KIA), which focuses on domestic and international investment.

The oldest sovereign wealth fund in the world was established in 1953. With $700 billion in assets under control as of October 2021, it was the fourth-largest sovereign wealth fund in the world.

In response to financial surpluses following the discovery of oil, KIA was established on February 23, 1953, to administer the Kuwaiti Government's money. The oldest sovereign wealth fund in the world is KIA.

The Kuwait Future Generations Fund, the Kuwait General Reserve Fund, and any additional assets pledged by the Ministry of Finance are all managed by KIA. 

To put KIA's magnitude in context, 15% of annual oil earnings are contributed to the Kuwait Future Generations Fund.

The General Reserve Fund (GRF), the Future Generations Fund (FGF), and any other funds committed to KIA by the Minister of Finance for and on behalf of the State of Kuwait are managed and administered by KIA. 

The State of Kuwait's entire oil revenue and earnings from GRF investments are held in the GRF. 

Each year, 10% of all state income, including GRF revenues, is given to the FGF. In addition, for the benefit of future generations, KIA administers FGF assets, allowing oil assets to be diversified into long-term financial ventures.

5. GIC Private Limited

Singapore's foreign reserves are managed by a sovereign wealth fund called GIC Private Limited. 

The Singapore Government owns the funds managed by GIC. Its investment returns supplement the country's annual budget in areas such as education, R&D, health care, and the physical environment.

With a 20-year investment horizon, the Government of Singapore Investment Corporation was established in 1981 to preserve and enhance the international buying power of the reserves while generating positive long-term returns. 

GIC invests worldwide in:

  • Developed market shares
  • Developing market equities
  • Nominal bonds and cash
  • Inflation-linked bonds
  • Private equity
  • Real estate through a network of ten offices in major financial centers across the globe 

The assets of the fund were assessed to be worth US$690 billion by the Sovereign Wealth Fund Institute.

GIC has traditionally kept its investments low-key. However, many of its assets sparked attention during the subprime mortgage crisis of 2007-2010. 

According to the Sovereign Wealth Fund Institute, the GIC was one of the year's most active SWF investors in 2013.

Researched & Authored by Aviral Mathur I LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

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