Sovereign Wealth Fund - SWF

What is a 'Sovereign Wealth Fund - SWF'

A sovereign wealth fund (SWF) consists of pools of money derived from a country's reserves, set aside for investment purposes to benefit the country's economy and citizens. The funding for a sovereign wealth fund (SWF) comes from central bank reserves that accumulate as a result of budget and trade surpluses, and from revenue generated from the exports of natural resources.

BREAKING DOWN 'Sovereign Wealth Fund - SWF'

The types of 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 (UAE) 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 the SWF is substantial. As of June 2015, the UAE's fund was worth about $773 billion. The estimated value of all SWFs is pegged at $7.1 trillion.

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's public pension system is designed to have contributions from the working populace support its elderly citizens. As global market conditions change, Japan's Government Pension Investment Fund (GPIF) 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% and also expressed its intent to increase global and domestic equity percentages from 12% each to 25%. Japan sets its sights on improving portfolio returns to compensate for shrinking subsidization from the working populace.

China Investment Corporation

The China Investment Corporation (CIC), a $747 billion SWF managing a portion of the nation's foreign reserves, was established in 2007 with the issuance of special bonds by the Chinese Ministry of Finance. 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.

CIC's 2016 domestic year-to-date (YTD) returns through April have yielded negative 6.49%, while exposure to developing markets such as Brazil have put forth a gain of 21.98% based on a rebound in commodity prices. The CIC's increased interest in U.S. investments saw the fund relocate its North American office from Toronto to New York, spurring concerns in Washington over expanding Chinese influence on U.S. economic sectors.