The first of its kind was the Kuwait Investment Authority (KIA), established to both invest Kuwait’s excess crude-oil revenues and diversify the nation away from its single resource dependence. The first SWF originated in 1953 as a constructive investment outlet for countries with budgetary surpluses and surplus export incomes. Sovereigns and Their Wealth: A Brief Origin Story

It was in line with this logic that the world’s oil-rich countries first began to birth the early SWFs. Thus, and ignoring superficial currency reserve math, actual savings would be net negative for oil nations unless their exhaustible resources are fully reinvested. Using an oil nation as an example, and leaning on Hartwick’s Rule for zero-sum intergenerational equity, extracting and selling non-renewable resources depletes one’s national capital base, unless the cash receipts are fully reinvested into one of the above financial, physical, environmental, or human capital stock factors. As of 2017, it is estimated that SWFs combined to hold more than $7.4 trillion in AUM, representing approximately 6% of global assets under institutional management.Įconomic theory wise, it is important to understand that SWFs form part of their respective country’s total national capital base, where total national capital is defined as the total combination of net financial assets, total physical capital stock (e.g., real estate, machines, infrastructure), unexploited environment, human capital, and unexploited natural resources. Though SWFs are principally global in outlook, they also invest domestically, especially where strategic development sovereign wealth funds are concerned. SWFs invest both in real and financial assets, ranging from stocks, bonds, real estate, precious metals, and hard infrastructure, to alternative investments such as private equity, hedge funds, and venture funds. Sovereign Wealth FundsĪ Sovereign Wealth Fund is a state-owned investment vehicle established to channel balance of payments surpluses, official foreign currency operations, proceeds of privatizations, government transfer payments, fiscal surpluses, and/or receipts from resource exports, into global investments on behalf of sovereigns and in the advance of goals. This article introduces its readers to sovereign wealth funds as an asset class, its “categories of purpose,” investment strategies, and trends, as well as its ever-evolving allocation strategies. Assessed as pure-play asset managers, SWFs are heterogeneous in investment objectives, which in turn drives their investment behavior, portfolio mixes, and success measures. As an asset class, they have grown exponentially in size, number, and relevance, as reflected by their ballooning AUM, currently pegged at $7.4 trillion, and the scope, scale, and sophistication of their deals. Cases in point: Was their mass rescue of the West’s banks-Citi, Merrill Lynch, UBS, and Morgan Stanley-during the 2008 financial crisis a collective investment in search of alpha or an exercise in geopolitical opportunism? Are China Investment Corporation’s African Infrastructure-for-Resources deals about non-renewable resource security or about geopolitical influence?Ĭonspiracy theories and geopolitical checkmates aside, SWFs are without a doubt now mainstays of the global investment landscape.

After all, they exist somewhere between the murky grey of return-maximizing, mega-cap asset managers, and clandestine government agencies quietly used to further sovereign agendas. Since their formal arrival on the investment scene in the 2000s, sovereign wealth funds (SWFs) have been met with a healthy mix of curiosity and trepidation.

SWFs' portfolio mixes are driven by the underlying economic and strategic priorities of their host governments, of which there are the three mentioned above: (1) stabilization, (2) capital maximization, and (3) strategic economic development.

Sovereign wealth funds typically allocate their assets across four investment classes: (1) cash and equivalents (2) fixed-income securities (3) global, public equities and (4) alternative investments, which include direct/private equity, venture capital and hedge fund, real estate, and infrastructure investments.

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