Sovereign Wealth Fund (SWF) Meaning

The capital gainsCapital GainsCapital gain refers to the profit resulting from selling a capital asset or investment at a price higher than its purchase price.read more are then used for activities directly benefitting the citizens or to protect the economy from inconsistent revenue cyclesRevenue CyclesThe revenue cycle defines and maintains the processes for completing an accounting process for recording revenue generated from services or products, which includes the accounting process of tracking and recording transactions from the beginning to end delivery of an order.read more in the future.

How do SWF Work?

Sovereign Wealth Funds are typically created when governments have budgetary surpluses and have little or no international debt. It is a return over liquidity approach. The fund’s objective is to deliver absolute returns by investing in global stocks, bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more, hedge fundsHedge FundsA hedge fund is an aggressively invested portfolio made through pooling of various investors and institutional investor’s fund. It supports various assets providing high returns in exchange for higher risk through multiple risk management and hedging techniques.read more, and private equity assets. These funds are similar to diversified mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more yet take on significantly more risk. Governments establish these funds for the following reasons.

Key Takeaways

  • A sovereign wealth fund is a government-run investment fund. The capital invested is typically generated from a country’s trade surplus.These funds are established for stabilizing an economy reliant on natural resource exports. Additionally, the fund is created to boost the savings of future generations.The most prominent wealth funds include the Norway Pension Fund Global, China Investment Corporation, Abu Dhabi Investment Authority, Hong Kong Monetary Authority Investment Portfolio, and the Kuwait Investment Authority.

  • It stabilizes a nation’s economy and protects it from inconsistent revenue cycles.Diversifying assets and investment holdings.Produce greater returns.Fund economic developments.Boost savings for future generations.

Funds intending long-term growth invest in assets that produce reliable returns. Others look for more liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more and invest in assets that can be converted to cash quickly.

Sovereign Wealth Fund Types

Types of Sovereign Wealth Funds are as follows.

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  • Stabilization FundsSavings for Future Generations FundsPension Reserve FundsReserve Investment Funds

Each type of wealth fund is designed for a specific purpose. Depending on the purpose, different assets and investments are chosen.

#1 – Stabilization Funds

Stabilization funds are the most common government investment. These funds are established to control the volatility associated with an economy that relies on natural resource exports.

If a country significantly exports natural resources such as gas and oil, it can experience rapid changes in revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more. This is caused by fluctuation in value depending on the market pricesMarket PricesMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more.

Stabilization funds, therefore, are intended to help maintain consistent revenues for the country and keep the economy protected from price fluctuations. For example, the Sovereign Wealth Fund of Norway was established to help protect its economy from volatility in the oil market.

#2 – Future Generations Fund

Future generation funds or savings funds are intended to invest in assets capable of producing long-term returns. These funds are designed to provide future generations with a savings backstop.

Future generations can use such funds in the event of a national disaster or when additional capital is needed. Countries can also decide to use these funds to support the elderly.

For example, Nigeria has set up a Future Generations Fund with diverse investments to provide its citizens with a savings reserve in the future.

#3 – Pension Reserve Fund

Countries will establish a pension reserve fund to help support the nation’s pension system. The funds can be used to help support pension payments and avoid straining the nation’s budget.

Governments with established pension reserve funds will typically invest with a long-term objective to maximize returns. For example, the National Pension Reserve Fund of Ireland was established to help the country support its aging population.

#4 – Reserve Investment Fund

Reserve investment funds are designed to be used for diverse investing activities. A part of the profit is kept by the Government for a specific purpose, like financing long-term projects, writing off any sudden capital expenses, etc. If the purpose is covering an emergency, the reserve investment funds portfolio would contain highly liquid assetsLiquid AssetsLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company’s balance sheet.read more.

Largest Sovereign Wealth Funds

Wealth funds are designed for specific purposes, and their holdings reflect those intentions. A list of the top five wealth funds is as follows.

#1 – Norway Government Pension Fund Global

Norway is one of the largest oil exporters. As a result, Norway needed a way to balance revenues coming into the country from foreign buyers. As a result, the Norway Government established this Sovereign Wealth fund in 1990 to protect the economy from the revenue cycles reliant on oil export.

According to SWFI, this fund is currently holding $1,273,540,000,000 in diversified assets located all over the world. Each year the country spends a limited amount of the funds.

#2 – China Investment Corp

China has a wealth fund called the China Investment Corp. The fund was developed in 2007 and is headquartered in Beijing, China. The fund invests in long-term assets, looking for maximum returns. Although the fund is designed to generate peak returns, it also implements strict risk management practices to avoid significant losses.

According to SWFI, this fund is holding $1,045,715,000,000 in current assetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more. The portfolio consists of diverse international investmentsInternational InvestmentsInternational investments are made outside of domestic markets and offer portfolio diversification as well as risk management opportunities. As a result, an investor can diversify his portfolio and extend his return horizon by making international investments.read more to help protect and stabilize the nation’s economy.

#3 – Abu Dhabi Investment Authority

The Emirate of Abu Dhabi developed the Abu Dhabi Investment Authority in 1976 to help control its oil revenues. The fund invests in the following types of assetsTypes Of AssetsAssets are the resources owned by individuals, companies, or governments expected to generate future cash flows over a long period. There are broadly three types of asset distribution: 1. Based on convertibility (current and non-current assets), 2. Physical existence (tangible and intangible assets), 3. Usage (operating and non-operating assets)read more.

  • EquitiesReal EstateFixed IncomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read morePrivate EquityPrivate EquityPrivate equity (PE) refers to a financing approach where companies acquire funds from firms or accredited investors instead of stock marketsread moreInfrastructureAnd Alternative InvestmentsAlternative InvestmentsAlternative investments refer to investments made in assets classified as non-traditional investment vehicles.read more

The fund has an established board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more that’s responsible for developing its investment strategy and purposes. The fund holds $579,621,120,000 in diversified assets.

#4 – Hong Kong Monetary Authority Investment Portfolio

The investment fund called the Hong Kong Monetary Authority Investment Portfolio is a wealth fund for the Hong Kong Special Administrative Region. The organization was established in 1993. It is designed to invest in liquid securities and assets.

The fund currently holds $576,029,000,000 in assets with a portfolio consisting of 75% bonds and 25% equities.

#5 – Kuwait Investment Authority

Kuwait Investment Authority is the wealth fund of Kuwait. It is the oldest wealth fund established in 1953. Kuwait established the fund to control oil revenues better.

The fund invests long-term and currently manages $533,650,000,000 in assets. It intends to diversify the economy by reducing the country’s reliance on oil revenue.

This has been a guide to Sovereign Wealth Fund and its Meaning. Here we discuss how they work, their types, and the largest SWF in the globe. You can learn more from the following articles –

A wealth fund is a government-run investment fund used for stabilizing an economy reliant on natural resource exports. Additionally, the fund is created to boost the savings of future generations. The capital invested is typically generated from a country’s trade surplus.

A wealth fund is a government-involved investment fund. Governments use it to generate capital from trade surpluses. Consequently, the capital gains stabilize the country’s economy.

Norway’s Government Pension Fund Global is the largest wealth fund. The fund is currently holding $1,273,540,000,000.

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