The Top 12 Sovereign Wealth Funds - And How They are Changing World Finance

By: KeithTimimi   Date: 19 October 2009

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19 October 2009. Although Sovereign Wealth Funds, or SWFs, still represent a small percentage of total world finance, with the Top 12 alone holding close to $3.2 trillion in assets they are big, and you can rest assured they plan on getting bigger.

With a lack of reform to western financial industries meaning that bubbles and crashes are only likely to get bigger, and with the IMF's noble idea of being a global lender of last resort still at the 'I Have a Dream' stage, exporting nations will continue to build up national reserves as a safeguard against volatility, and will want to put those reserves to work.

See the Slide Show >>> The World's Wealthiest Sovereign Funds

They will be looking for - how can we put this politely? - investment vehicles that are more lucrative and more stable long-term than US Treasuries. Not that they will stop buying Treasuries, mind, and rumours of the dollars demise are greatly exaggerated, but they will certainly be diversifying.

Over and above the funds needed for interventions in forex markets to support the national currency, there are two clear paths for investment of excess reserves; invest in your own country, by building infrastructure and developing domestic industries, and invest abroad. Sovereign Wealth Funds are an excellent vehicle to diversify international investment regimes.

And since exporters such as oil producers in the Gulf States will be bolstered by rising prices, and the Chinese manufacturing juggernaut continues to consolidate its lead in global trade, SWFs are going to increase in size and power. 

Recent analysis by the Investor Responsibility Research Center Institute and RiskMetrics Group says

 

Despite the current drops in oil prices, considering the forecasted long-term trends in oil demand and supply, and barring heretofore unseen conservation or alternative energy use growth, petroleum-based SWFs will grow at a greater pace than other categories of investors. They will therefore have increasing influence on the global economy in the long run.

So who are these SWFs?

Thanks to the work of the SWF Institute, we are now able to track the estimated or reported size of the largest SWFs. In total it recognises 56 funds, of which the largest 12 are as follows, according to its April 2009 estimates.

Country Fund Name Assets $Billion Inception Origin SWF to Foreign Exchange Reserve Ratio Linaburg-Maduell Transparency Index
UAE - Abu Dhabi Abu Dhabi Investment Authority $627 1976 Oil
13.9
3
Norway Government Pension Fund – Global $445 1990 Oil
8.8
10
Saudi Arabia SAMA Foreign Holdings $431 n/a Oil
1.1
2
China SAFE Investment Company $347.1**   Non-Commodity
0.2
2
China China Investment Corporation $288.8 2007 Non-Commodity
0.1
6
Singapore Government of Singapore Investment Corporation $247.5 1981 Non-Commodity
1.4
6
Kuwait Kuwait Investment Authority $202.8 1953 Oil
10.6
6
Russia National Welfare Fund $178.5* 2008 Oil
0.4
5
China - Hong Kong Hong Kong Monetary Authority Investment Portfolio $139.7 1993 Non-Commodity
1.0
8
Singapore Temasek Holdings $122 1974 Non-Commodity
0.7
10
China National Social Security Fund $82.4 2000 Non-commodity
nil
5
UAE - Dubai Investment Corporation of Dubai $82 2006 Oil
1.8
4

Out of the top 12 funds, six or 50% are from oil or gas exporters. The Big Three are led by the world's largest Sovereign Wealth Fund, the Abu Dhabi Investment Authority or ADIA, which was started in 1976 and worth an almost-TARP-sized $627 billion. The Big Three also includes Norway's Government Pension Fund, started in 1990 and now worth $445 billion, and Saudi Arabia's Sama Holdings, worth $431 billion.

Other oil and gas majors include the oldest SWF, the Kuwait Investment Authority, which was started in 1953 and now holds $202.8 billion, Russia's National Wealth Fund, a newcomer in 2008 but already holding $178.5 billion in assets, and one of the other UAE funds, the Investment Corporation of Dubai, another newcomer from 2006 and now worth $82 billion.

Exporters make up the other half of the list, with funds from two rather different countries. China, the world's most populace country and the leader in global trade, has four funds in the top 12, if you include the Hong Kong Monetary Authority Investment Portfolio, which holds $139.7 billion in assets not needed for short-term currency support, and was started pre-handover in 1993. Mainland China has learnt from both Hong Kong and Singapore and started three large funds, the SAFE Investment Company managing $347.1 billion, the China Investment Corporation, started in 2007 and already worth $288.8 billion, and the National Social Security Fund, managing $82.4 billion since 2000.

The other two spots are held by idiosyncratic Singapore. It is a tiny country with no natural resources other than the vision and hard work of its people, which it is has parlayed into the Government of Singapore Investment Corporation, started in 1981 and worth $247.5 billion, and the older Temasek Holdings, started in 1974 and worth $122 billion.

When looking at all 56 funds, the SWF Institute estimates that 44% of fund assets are funded from Middle East SWFs, 45% from Asia, 17% from Europe and 4% from elsewhere. 61% of fund assets are derived from oil and gas revenues.

The Investor Responsibility Center/ RiskMetrics report suggests that over half of the assets of SWFs are in equities - i.e. direct purchases of the stock of large companies. In some cases that involves majority or outright purchase.

It is here that much unease was expressed recently about the influence of SWFs. The fear is that SWFs will meddle in the affairs of companies they control and push them to make decisions that support national policies or political ends rather than to pursue business objectives.

Keen observers will note that concern reached a fever pitch prior to the Lehman's/ AIG collapses, and that since those debacles and with the credit crunch leading many to look desperately for funds, the complainers are strangely silent.

This means one of two things. Either the complaints themselves were politically motivated, or there are issues that are being ignored because of the more pressing challenges of the Financial Crisis.

We believe that both points are true. Let us ignore the pseudo-colonialist 'do-as-I-say-not-do-as-I-do' brigade of western whiners, and instead look at what real issues may still remain.

The expert consensus is that if a fund operates with transparent investment objectives, then it is no better or worse than any other large holder of assets. Transparency has therefore become a watchword for those who wish to see this new source of money remain as generally benign(thanks to its long-term objectives) as it has during the crisis.

The SWF Institute has therefore developed the Linaburg-Maduell Transparency Index., which rates funds on the following ten criteria.


Point Principles of the Linaburg-Maduell Transparency Index
+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 locations 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 If applicable, the fund clearly identifies subsidiaries and contact information
+1 If applicable, the fund identifies external managers
+1 Fund manages its own web site
+1 Fund provides main office location address and contact information such as telephone and fax

 

Developed by Carl Linaburg and Michael Maduell

According to this index, completely transparent funds scoring a perfect 10 are run by the Norway Government Pension Fund, Singapore's Temasek Holdings, Ireland's National Pensions Reserve Fund, the Alaska Permanent Fund, UAE's Mubadala Holding Company, and the New Zealand Superannuation Fund.

The most secretive funds are the Algeria Revenue Regulation Fund, the Brunei Investment Agency, Iran's Oil Stabilisation Fund, Nigeria's Excess Crude Account, and funds from Oman, Botswana, Venezuela, Kiribati and Mauritania.

As wealth diversifies out of the 'north' and into the 'south', you can expect to see a growth in the value and importance of SWFs. This is will be partly driven by the gap between supply and demand of oil and gas, but also from the economic growth of emerging markets. Right now only 2 BRICs have SWFs, but an Indian SWF should materialise soon, and although Brazil's SWF might be further off, it will happen too.

This is just one more part of the post-US-economic-hegomony infrastructure that is currently being created by 'mash-up' and that will transform the world economy in our lifetimes.

Keith Timimi, EconomyWatch.com

 

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