Sovereign Wealth Fund

Sovereign Wealth Fund

12th March , 2009

Roadmap 

Definition



Types of SWF



Market Size and future trends



Benefits & Concerns



Does India need it?



Conclusion

What are SWFs ? 

Pools of money derived from a country's reserves, which are set aside for investment purposes that will benefit the country's economy and citizens.



United Arab Emirates (UAE) relies on oil exports for its wealth; therefore, it devotes a portion of its reserves to an SWF that invests in other types of assets that can act as a shield against oil-related risk. .

3

Defining SWFs 

IMF (2008) classifies SWFs into 5 groups:

•

Stabilization Funds (designed to insulate the budget and the economy against commodity price swings)

•

Savings Funds for Future Generations (to enable conversion of non-renewable assets into a more diversified portfolio of assets and mitigate the effects of Dutch disease)

•

Reserve Investment Corporations (these assets are still counted as reserve assets and are established to increase the return on reserves, though at a higher risk) 4

Defining SWFs •

Development Funds (designed to help fund socioeconomic projects and infrastructure. These funds usually have large domestic component)

•

Contingent Pension Reserve (particularly to finance social security and health expenditures for rapidly ageing populations)

5

Types of SWF  Commodity

SWF - Export oriented nations

 Non-Commodity

SWF - Excess of FOREX

Market Size and Growth Trends 

Size of sovereign wealth funds stands at USD3.8 trillion, approximately 60% of world’s foreign exchange reserves – exceeds the scope of world’s hedge funds (USD1.5 trillion~USD2.0 trillion)



Growth of sovereign wealth funds likely to continue – Likely to reach USD28 trillion by 2022, more than double the amount of FX reserves (U$13 trillion) – Share of SWF funds in global financial asset holdings to grow to 9.2% in 2022 (Morgan Stanley 2007)

Major Sovereign Wealth Funds AUM ($ billion)

Year of Est.

Abu Dhabi Investment Authority

875

1976

Singapore

GIC

330

1981

Saudi Arabia

(several agencies)

330

-

Norway

Norges Bank Investment Management

300

1996

China

China Investment Corp.

200

2007

Singapore

Temasek Holdings

100

1974

Kuwait

Kuwait Investment Authority

70

1953

Australia

Australia Future Fund

40

2006

Russia

Stabilization Fund

32

2003

Brunei

Brunei Investment Agency

30

1983

Korea

Korea Investment Corp.

20

2005

Country

Name of Institution

UAE

First Group: Natural Resource Funds 

Sovereign wealth funds of oil-producing countries have 15 to over 50-year history



USD 1.4 tn~USD2 tn, or 70% of total SWF asset holdings are in the hands of resource-rich countries, such as UAE and Norway



Focus: – Maintain economic stability against commodity price fluctuation – Ensure future generations may not be disadvantaged by the exploitation of natural resources by current generation

U.S. Euro area % of global GDP

Japan

Emerging Asia

Oil exporters

2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 1998

2000

2002

2004

2006

07F

Second Group: Foreign Reserve Funds 

SWFs in export-led Asian economies increased sharply after 2000 – Asia’s foreign reserve funds estimated at USD 520bn~USD 770bn, or 26% of global SWF funds (to increase to 50% by 2015) – No. of Asian countries establishing non-commodity SWFs continues to increase



Focus – Generate higher returns than local sterilization bond cost

Global Foreign Exchange Reserves USD billion 6,000 5,000 4,000 3,000 2,000 Rest of World 1,000

Asia

0 1995

1997

1999

2001

2003

2005

2007

Third Group: Pension Reserve Funds 

Preserve and Enhance Wealth for the Future Generations

– Advanced countries have set aside a portion of their pension funds and manage them separately to prepare for the aging society – Pension funds of New Zealand, France & Ireland manage about USD 81bn, or 2.8%~4.1% of global SWF market. Focus – Generate higher return from an active asset allocation and a long-term management ⇒ expand investment horizon to 20~30 years

Percent of population aged 65 and over

30 Developing w orld 25 Developed w orld 20 15 10 5 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Benefits of SWFs For home countries,

•

• • • • •

Fiscal stabilization – shield government budget from volatile oil prices – manage the costs of social security Saving for future generations and intergenerational transfer Reduce the cost of holding reserves Introduce more professional investment and risk management framework Better management of public sector balance Sheets Stabilizing force in financial markets

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For international financial markets, •

They facilitate a more efficient allocation of revenues from commodity surpluses across countries;

•

Help recycle current account surpluses, and enhance market liquidity (this is of some importance currently due to global financial stress);

•

Have longer time horizons which may bring stability.

•

Permit more diversified partnership with other players such as private equity and hedge funds, permitting better risk management

•

They now compete with Central Banks, hedge funds, private equity as the international capital providers of last resort. 16

Concerns  Transparency

 Conflicts

& Accountability

of Interest, Potential Insider Trading, and Regulatory Effectiveness

Does India need it? Advantages 

we need to improve the returns on our foreign exchange reserves.



SWF can play a vital role in securing our future energy needs



Can play a constructive and complementary role in our geopolitical and economic strategy.

Disadvantages 

Investment required in Domestic Economy



Major part of the fund i.e. Portfolio investment can flow out anytime.



RBI may not be prepared.

Concluding Remarks 

SWFs are large, growing, and will continue to play an important role in global financial and capital markets.



Their growth reflects relative increase in share of global wealth of resource-rich and some Asian exporters. The traditional industrial countries will need to accommodate those countries from which major SWFs originate.



International community has a stake in ensuring that SWFs Code of Governance is compatible with global stability; while SWFs have a stake in predictable behavior of the recipient countries. 20

References  Swf

Institute

 Investopedia  Wharton

Knowledge centre

 Deutsche

Bank report

THANK YOU