Sovereign Wealth Funds
Sovereign Wealth Funds (SWF) are defined by capital, or assets, that are owned by the state. Typically, sovereign wealth funds are invested on a global scale.
SWF originates from central bank reserves which act as a surplus from trade and budget increases. The type, size and amount of acceptability depends on the governments that are investing, or trading, with each other. An important consideration in investments involving SWF is the FX rate as an investment with a strengthening currency will produce a currency gain on top of the gain/loss achieved on the investment.
The economic rules and regulations of the different governments are the main determinants in the liquidity of the transactions. Political behaviour is also a main consideration in the liquidity, size and number of the transactions made.
The IMF (International Monetary Fund) is an example of a European Sovereign Wealth Fund. Another example of an SWF is CALPERS which is the Californian Pension Fund. CALPERS is one of the richest pension funds on the planet. The highest valued SWFs are located in countries that contain the largest oil reserves being Norway and in the Middle East.
They can be classified into 5 main categories, which are:
- Stabilization Funds
- Savings/Future Generations Funds
- Pension Reserve Funds
- Reserve Investment Funds
- Strategic Development SWFs
As these SWFs come from state-owned capital, the investment objective may not be known and could have a higher agenda. This is a very dark way of looking at SWFs as they have been known to help out struggling companies. An example of this help are the Middle Eastern SWFs helping Citigroup in the Middle East after the financial crisis in 2008. Also the investment from another government gives the government a little more power over another government that may not be wanted.
This means that SWF investments may be considered as strategic and opportunistic whereas the true intention could be to help.