Sovereign Wealth Funds: Types and Stakeholders

A **sovereign wealth fund** (SWF) is a state-owned investment fund. It may own financial assets or real assets in its portfolio. Thirty years ago, there weren't many SWFs. That has definitely changed.

Now there are quite a few. What would you expect the purpose of a sovereign wealth fund to be?

Yes! This is the purpose of a "development fund." The other two were good answers as well. In fact, there are five main types of SWFs:

Yes! This is the purpose of a "pension reserve fund." The other two were good answers as well. In fact, there are five main types of SWFs:

Yes! This is the purpose of a "budget stabilization fund." The other two were good answers as well. In fact, there are five main types of SWFs:

| Type | Objective | |-----|-----| | Budget Stabilization Fund | Insulate the country from volatility and external shocks | | Development Fund | Obtain resources for socioeconomic projects like infrastructure | | Savings Fund | Transform nonrenewable resources into diversified assets | | Reserve Fund | Reduce the negative carry costs of holding foreign reserves | | Pension Reserve Fund | Contingent liability matching |

Based on the table above, which of these looks like the right fit for a country following an oil discovery?

Exactly. That would be a responsible measure to take, and it would benefit a lot of people in the country. In fact, that leads directly to stakeholders. Stakeholders include the government, asset managers, and various committees and groups associated with the SWF, and of course, the current citizens. Would *future* citizens also be stakeholders?

Not really. Reserve funds are for getting a higher return on foreign currencies held.

Not directly. The oil money may eventually find its way to a socioeconomic project, but there's a more direct form.

Sure.

Actually, they would be.

The choice to place those resources into something more sustainable will almost certainly serve to benefit future generations. SWFs generally have very unknown liabilities, compared to other institutional investors. Time horizons vary depending on the purpose, and can be generally summarized like this: | Type | Investment Horizon | |-----|-----| | Budget Stabilization Fund | Short; capital needs to be ready when needed | | Development Fund | A mixture; it depends on the planned projects | | Savings Fund | Long-term; it's more like a foundation for the people | | Reserve Fund | Long-term; this is similar return targets to foundations and endowments | | Pension Reserve Fund | Long-term; this bridges a generation gap for savings |

What would you expect to see if you looked at the holdings of a few of these portfolios?

Which type of fund is now most able to take on a 20-year project?

Unlikely. That's what the fund is trying to get *away* from, generally.

Sure. Those funds have investment horizons that make private equity an appropriate choice. But liquidity is also an issue, and pension reserve funds have liquidity needs that vary with time. Here's a quick summary of liquidity needs across the five fund types: | Type | Liquidity needs | |-----|-----| | Budget Stabilization Fund | High; budget issues can come any time | | Development Fund | Varies; it depends on the projects | | Savings Fund | Low; this is a long-term commitment | | Reserve Fund | Moderately high; balance of trade issues is always possible | | Pension Reserve Fund | Varies; it depends on if the fund is accumulating or not |

Probably not. The budget stabilization funds have a short investment horizon, and real estate is not a great choice for that reason.

Yes! Savings funds are those with long investment horizons and the lowest liquidity needs, so it wouldn't be as dangerous for them to tie up money for a couple of decades. Those future generations will appreciate the effort!

Not quite. Reserve funds have moderately high liquidity needs and wouldn't want to commit to tying up money for so long.

Not quite. Development funds may be able to lock up an investment for a while, but it depends. Think about the fund type with a long investment horizon and the lowest liquidity needs.

To summarize: [[summary]]

To protect the government from budget shortfalls

To save for infrastructure projects

To accumulate funds to pay retirees

Savings fund

Reserve fund

Development fund

Yes

No

Savings fund

Reserve fund

Development fund

Real estate in a budget stabilization fund

Government bonds in a reserve fund

Private equity in a pension reserve fund

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