What is a Sovereign Wealth Fund?
The IFSWF is a diverse group of sovereign wealth funds from every inhabited continent. They have varied economic roles and mandates.
There is an official definition of a sovereign wealth fund, written by sovereign wealth funds themselves in 2008 and published in Appendix I of the Santiago Principles. In short, this defines sovereign wealth funds as having three key characteristics:
- A sovereign wealth fund is owned by the general government, which includes both central government and sub-national governments.
- Includes investments in foreign financial assets.
- They invest for financial objectives.
These key elements exclude:
- Public pension funds, which are ultimately owned by the underlying policy holders.
- Central bank reserve assets, which are not invested.
Sovereign Wealth Funds by Mandate
Sovereign Wealth Funds Objectives
Savings funds are sometimes referred to as intergenerational savings funds because they have decades-long investment horizons. Savings funds are often set up by commodity-rich countries to save a portion of their resource wealth for the future. Oil, gas and precious-metal reserves are finite: one day they will run out.
Stabilisation funds are designed as pools of capital which governments can draw on to smooth the budget. Often, commodity-rich nations create these funds to manage revenue streams; the fund will save some of the proceeds from large influxes of revenue and pay out when commodity receipts fall below a specified amount.
Since the global financial crisis, there has been a marked change in how governments use their liquid and illiquid assets. With interest rates at record lows and global economic growth sluggish, the appeal of traditional savings and stabilisation funds has diminished. Instead, many states have created development funds that form part of their domestic economic policies.
Not every SWF has a single objective. Many funds combine two or more of the functions listed above, mixing stabilisation, savings and development. While these hybrid funds arise all over the world they are particularly common in developing economies in sub-Saharan Africa.