Sovereign Wealth Fund (SWF)

What Is a Sovereign Wealth Fund (SWF)?

A sovereign wealth fund is a state-owned investment fund comprised of money generated by the government, often derived from a country's surplus reserves. SWFs provide a benefit for a country's economy and its citizens.

The funding for a SWF can come from a variety of sources. Popular sources are surplus reserves from state-owned natural resource revenues, trade surpluses, bank reserves that may accumulate from budgeting excesses, foreign currency operations, money from privatizations, and governmental transfer payments.

In general, sovereign wealth funds usually have a targeted purpose. Some countries have sovereign wealth funds that can be similar to venture capital for the private sector.

Key Takeaways

  • A sovereign wealth fund is a state-owned investment fund.
  • Sovereign wealth funds can be derived from a variety of sources and used for a variety of purposes.
  • Acceptable investments in each SWF vary from fund to fund and country to country.
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Understanding Sovereign Wealth Funds

Similar to any type of investment fund, SWFs have their own objectives, terms, risk tolerances, liability matches, and liquidity concerns. Some funds may prefer returns over liquidity and vice versa. Depending on the assets and objectives, sovereign wealth funds’ risk management can range from very conservative to a high tolerance for risk.

Types of SWFs

Traditional classifications of sovereign wealth funds include:

  • Stabilization funds
  • Savings or future generation funds
  • Public benefit pension reserve funds
  • Reserve investment funds
  • Strategic Development Sovereign Wealth Funds (SDSWF)
  • Funds targeting specific industries (possibly emerging or distressed)
  • Foreign currency reserve assets. (Some classifications may not consider these funds as SWFs.) Foreign currency reserve funds are powerful funds that may be used for specific governmental purposes and/or for helping to manage the trading power of a currency globally.

Investment Terms

The amount of money in a SWF is usually substantial. The acceptable investments included in each SWF vary from fund to fund and country to country. Countries can create or dissolve SWFs to match the needs of their population. Funds with liquidity concerns may limit investments to only very liquid public debt instruments. In some cases, sovereign wealth funds will invest directly in domestic industries. Liquidity, debt, and allocation balances can be some of the key factors in investment terms.

There can be a concern that SWFs have a political influence. Some of the most significant sovereign wealth funds are not entirely transparent about their investments and corporate governance practices.

Real-World Examples

The top five largest SWFs by assets as of August 2020 included:

  1. Norway Government Pension Fund Global $1,073,590,000,000
  2. China Investment Corporation $940,604,000,000    
  3. Abu Dhabi Investment Authority $579,621,120,000
  4. Kuwait Investment Authority $533,650,000,000      
  5. Hong Kong Monetary Authority Investment Portfolio $528,054,000,000   

Norway Government Pension Fund Global

71%

The 2019 allocation of Norway's sovereign wealth fund in equities.

Norway’s Government Pension Fund Global is the largest in the world. It was established in 1990 as the Government Petroleum Fund, with the initial purpose of creating a fund to hold surplus revenues from the country’s oil trade. In 2006 it changed its name to the Norway Government Pension Fund Global.

The Norway fund invests in equities, fixed income, and real estate. In 2019, it reported a return of 19.9%, led by equities with a return of 26.0%. In 2019, 71% of the fund was in equity, 3% in real estate, and 27% in fixed income.

China Investment Corporation

The China Investment Corporation is a $941 billion SWF. This fund is used for managing a portion of the country’s foreign currency reserves. The Chinese Ministry of Finance established the China Investment Corporation in 2007 by issuing special bonds.

Public Pensions

The U.S. Social Security Trust Funds and the Government Pension Investment Fund Japan are the two largest government public pension funds in the world. The SWF Institute doesn’t include these in the pure SWF rankings.

The U.S. Social Security Trust Funds has $2.9 trillion in total assets. The Government Pension Investment Fund for Japan has $1.5 trillion in assets. These funds focus on helping a growing elderly population from funding through the current labor force.

The U.S. Social Security Trust Funds invest in special issue securities. The Japan GPIF is more diversified with allocations to domestic bonds, foreign bonds, domestic equities, and foreign equities.

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  2. Norges Bank Investment Management. "2019 Government Pension Fund Global Annual Report," Page 16. Accessed Aug. 19, 2020.

  3. Norges Bank Investment Management. "History." Accessed Aug. 19, 2020.

  4. Sovereign Wealth Fund Institute. "China Investment Corporation." Accessed Aug. 19, 2020.

  5. International Forum of Sovereign Wealth Funds. "China Investment Corporation." Accessed Aug. 19, 2020.

  6. Sovereign Wealth Fund Institute. "Top 100 Largest Public Pension Rankings by Total Assets." Accessed Aug. 19, 2020.

  7. Social Security Administration. "Trust Fund FAQs." Accessed Aug. 19, 2020.

  8. Government Pension Investment Fund. "Investment results for 1Q of fiscal 2020," Page 3. Accessed Aug. 19, 2020.