In this series, we bust the jargon and explain a popular investing term or theme. Here it’s Sovereign Wealth Funds.
What are sovereign wealth funds?
A sovereign wealth fund (SWF) is a state-owned fund that invests in a range of assets, including bonds, shares, precious metals, private equity and property.
There are about 95 SWFs worldwide managing about $9 trillion in assets, giving them huge power and influence in global markets, and they have shown a particular appetite for buying or investing in British companies.
Their cash comes from the revenues from the export of oil and other resources, the proceeds of privatisations, Government surpluses and foreign-exchange reserves.
State-owned: Sovereign wealth funds have been compared to pots of rainy-day savings for nations
How do they work?
SWFs have been compared to pots of rainy-day savings for nations. But despite this common purpose to support the state, they operate in different ways, with varied goals. Some, like those in the Middle East and Norway, manage the nation’s oil wealth.
Others are charged with the effective management of the country’s assets, while others have specific priorities. The Chinese National Social Security, the second of that nation’s SWFs, for instance, provides funds for the social security system.
Which are the largest funds?
The world’s biggest is the $1.33trillion Norges Bank investment management, set up in 1969 following Norway’s discovery of North Sea Oil.
The other members of the top five are: the China investment Corporation ($1.2trillion), the Abu Dhabi investment Authority ($829billion), the Chinese State Administration of Foreign Exchanges ($817billion) and the Government of Singapore investment Corporation ($744billion).
The Norwegian fund’s value is equivalent to $257,000 for every man, woman and child in that country. Surging oil prices will have boosted this number.
Are they independent of government?
Many funds are tightly linked to their governments, seeking to further their interests and bolster their power. Others are separate entities, answerable to their governments, but not directed by them.
Nicolai Tangen, chief executive of the Norway fund, says this fund is financial rather than political. But the country’s centre-left government has ordered the fund to freeze its Russian assets. These will be written off.
Does the UK have a fund?
Britain does not have a SWF, although Whitehall is reported to have considered the establishment of one in 2020. Taxpayer cash would have been used to support regional businesses as part of the post-pandemic levelling up programme.
Other nations’ funds are fond of acquiring UK assets. For example, the Qatar Investment Authority owns Harrods, a stake in Canary Wharf, The Shard and is the largest shareholder in Sainsbury’s.
Which fund is most controversial?
There are frequently differences of opinion about the investment choices in funds.
The Public Investment Fund of Saudi Arabia – which aims to project Saudi influence and diversify the economy – frequently makes the headlines.
The fund’s £300million purchase of an 80 per cent stake in Newcastle United football club last year was opposed by many. Currently, the Russian Direct Investment Fund is the SWF in the spotlight. The UK is among the countries that has frozen its assets.