Home
About Us
About Us
Sovereign Wealth Fund(SWF)
Sovereign Wealth Fund (SWF)
A sovereign wealth fund is a special investment fund established to manage a nation’s assets. It is characterized by the direct or indirect involvement of the government in its operations.
U.S. Treasury Department
2007.6
“A sovereign wealth fund is a government investment vehicle funded by foreign exchange assets which manages those assets separately from official reserve.”
IMF Working Definition
2008.10
“Sovereign wealth funds (SWFs) are defined as special purpose investment funds or arrangements, owned by the general government.
Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.
The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.”
A significant number of sovereign wealth funds (SWFs) have long been operated by countries in the Middle East that export oil. For example, the Kuwait Investment Authority (KIA) was established in 1953, and the Abu Dhabi Investment Authority (ADIA) of the UAE was founded in 1976.
In the 2000s, sustained increases in oil prices enabled oil-producing countries, particularly in the Middle East, to accumulate vast reserves of "oil money." At the same time, following the Asian financial crisis of the late 1990s, several Asian countries amassed large foreign exchange reserves through current account surpluses. These developments prompted the establishment of new sovereign wealth funds to ensure the efficient management of public funds.
According to the Sovereign Wealth Fund Institute, the total assets of global sovereign wealth funds were estimated at USD 7.5 trillion at the end of 2019. Of this, 52%—approximately USD 3.9 trillion—originated from commodity exports, while the remaining 48% (USD 3.6 trillion) was based on non-commodity sources such as foreign exchange reserves and privatization proceeds.
In terms of investment timing, most SWFs began large-scale overseas investments between the second half of 2007 and the first quarter of 2008. These were followed by a period of reduced investment activity due to the global financial crisis (late 2008 to early 2009), and then a resumption of foreign investments from the latter half of 2009.
Traditionally focused on safe assets such as developed market currencies and government bonds with relatively low returns, SWFs have increasingly diversified their investments. This includes expanding into alternative assets such as emerging market corporate bonds, equities, and commodities—aimed at better risk management and higher returns.
Looking ahead, continued strength in commodity prices and growing foreign exchange reserves in emerging markets are expected to drive further growth in existing SWFs and the establishment of new ones. As SWFs play a larger role in global financial markets as sources of capital, recipient countries—especially developed nations—are likely to respond with heightened protectionism. As a result, discussions around enhancing the transparency and accountability of sovereign wealth funds are also expected to gain momentum.
The substantial size and high liquidity of SWFs’ assets have important investors. Their investments have been beneficial to global financial markets in terms of increasing market liquidity and financial resource allocation. However, recipient countries have express reservations about possible political, rather than commercial, reasons behind SWFs’ investments, and this has led to the formation of the International Working Group of Sovereign Wealth Funds (IWG), with the IMF providing support. In 2008, the IWG published a set of voluntary principles at a summit in Chile. The Generally Accepted Principles and Practices for Sovereign Wealth Funds (“GAPP”), also known as the Santiago Principles, provide common standards regarding transparency, independence and governance. The IWG met in Kuwait in April 2009 and reached a consensus (“Kuwait Declaration”) on the establishment of the International Forum of Sovereign Wealth Funds (IFSWF).
The International Forum of Sovereign Wealth Funds (IFSWF) was established by the International Working Group of Sovereign Wealth Funds. IFSWF is a voluntary group of SWFs that meet regularly to exchange views on issues of common interest, facilitate an understanding of the Santiago Principles and SWF activities. Recent Annual Meetings were held in Juneau, Alaska (2019) and Marrakesh, Morocco (2018).
◎ The Santiago Principles
The Santiago Principles are a set of 24 voluntary guidelines, a set of generally accepted principles and practices (“GAPP”), for SWFs. It was drafted at an IWG meeting in Chile in 2008.