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. .

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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)

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Defining SWFs

• Development Funds (designed to help fund socio-

economic 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)

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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 Year of
Country Name of Institution
($ billion) Est.
Abu Dhabi Investment
UAE 875 1976
Authority
Singapore GIC 330 1981
Saudi
(several agencies) 330 -
Arabia
Norges Bank Investment
Norway 300 1996
Management
China China Investment Corp. 200 2007
Singapore Temasek Holdings 100 1974
Kuwait Investment
Kuwait 70 1953
Authority
Australia Australia Future Fund 40 2006
Russia Stabilization Fund 32 2003
Brunei Brunei Investment Agency 30 1983
Korea Korea Investment Corp. 20 2005
 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 Japan Emerging Asia Oil exporters
% of global GDP
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

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.
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Concerns
 Transparency & Accountability

 Conflictsof 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 geo-

political 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.
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References
 Swf Institute

 Investopedia

 Wharton Knowledge centre

 Deutsche Bank report

THANK YOU