What is a 'Sovereign Wealth Fund - SWF'?

A sovereign wealth fund comprises pools of money derived from a country's reserves, set aside for investment to benefit the country's economy and citizens. The funding for an SWF comes from central bank reserves that accumulate because of budget and trade surpluses, and revenue generated from the exporting natural resources.

BREAKING DOWN 'Sovereign Wealth Fund - SWF'

The acceptable investments included in each SWF vary from country to country. Countries with liquidity concerns limit investments to only very liquid public debt instruments.

Some countries have created SWFs to diversify their revenue streams. For example, the United Arab Emirates relies on oil exports for its wealth. Therefore, it devotes a portion of its reserves to an SWF that invests in diversified assets that can act as a shield against oil-related risk. The amount of money in an SWF is substantial. As of 2018, the UAE's fund was worth about $683 billion, and Norway’s sovereign wealth fund, the largest in the world, has exceeded $1 trillion for the first time in 2017, according to the World Economic Forum.

Japan's Government Pension Investment Fund

Japan faces the dilemma of a growing elderly population combined with a dwindling labor force and negative government bond yields. The nation designed its public pension system to have contributions from the working populace support its elderly citizens. As global market conditions change, Japan's Government Pension Investment Fund retooled its investment strategy to grow assets earmarked for pension benefits.

In 2014, GPIF officials announced a radical shift away from domestic bonds to global equities. The massive $1.1 trillion fund reduced domestic bond allocation targets from 60 to 35 percent and also expressed its intent to increase global and domestic equity percentages from 12 percent each to 25 percent. Japan sets its sights on improving portfolio returns to compensate for shrinking subsidization from the working populace.

China Investment Corporation

The China Investment Corporation, an $814 billion SWF as of 2017, manages a portion of the nation's foreign reserves. The Chinese Ministry of Finance established the CIC in 2007 by issuing special bonds. The fund targets equity, income and alternative investment strategies such as hedge funds. As hedge fund returns have lagged common stock indices since 2009, CIC managing director Roslyn Zhang expressed disappointment in 2016 over poor performance and exorbitant fees.

There is a concern that SWFs have political influence. Some of the biggest funds, except Norway, are not completely transparent about their investments and corporate governance practices, which leads some to think they are for political not financial motives.

RELATED TERMS
  1. Sovereign Fund Of Brazil

    The Sovereign Fund of Brazil is a sovereign wealth fund for the ...
  2. Government Pension Fund of Norway

    The Government Pension Fund of Norway is comprised of two separate ...
  3. Alaska Permanent Fund

    The Alaska Permanent Fund pays an annual dividend to eligible ...
  4. China Investment Corporation - ...

    China Investment Corporation is the sovereign wealth fund of ...
  5. Sovereign Risk

    Sovereign risk is the risk that a central bank will impose foreign ...
  6. Foreign Fund

    A foreign fund is a fund that invests in companies outside the ...
Related Articles
  1. Investing

    5 Largest Sovereign Wealth Funds

    Oil-rich Norway tops the list of the largest sovereign wealth funds in the world.
  2. Investing

    Sovereign Wealth Firms To Slow U.S. Buys: BofA

    U.S buying by sovereign wealth investments could come to an end soon as they seek higher returns, according to Bank of America.
  3. Investing

    The Risks Of Sovereign Bonds

    Sovereign debt can play an important role in providing international diversification to individual investors.
  4. Investing

    Hedge Funds Go Retail

    Find out how average investors are breaking into what was once reserved for the ultra rich.
  5. Investing

    The Top 5 International Bond Funds for 2016

    Understand the opportunities available within the international bond market, and learn about the top-rated global bond funds for 2016.
  6. Investing

    BNDX: Vanguard Total International Bond ETF

    Learn about the Vanguard Total International Bond exchange-traded fund, which invests in investment-grade foreign, sovereign and corporate bonds.
  7. Financial Advisor

    Top 3 German Bonds ETFs (GGOV, BNDX)

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and private bonds issued by Germany with different duration yields.
  8. Investing

    What are hedge funds?

    A hedge fund is basically an investment partnership. It's the marriage of a fund manager and the investors, who pool their money together into the fund.
  9. Investing

    Investing in High-Yield Corporate Bond Funds

    High-yield corporate bond funds provide an interesting investment option, particularly for private investors chasing returns and a broad diversification.
  10. Investing

    Bond Funds Boost Income, Reduce Risk

    Bond funds can provide stable returns for those who depend on their investment income.
RELATED FAQS
  1. What are the main differences between a provident fund and a pension fund?

    Learn about some of the primary differences between the benefits of provident funds and pension funds, two types of retirement ... Read Answer >>
Trading Center