Book Review: Sovereign Wealth Funds – States Buying the World

By Japhet Lutambi

SWFsWhat are Sovereign Wealth Funds (SWFs)? What are the Sources, Size and objectives of SWFs? Why SWF had little media interest on their investment prior to 2007? Why commentators are concerned at the Rise of SWFs? Lixia Loh (PhD) addresses these questions in her book; Sovereign Wealth Funds: States Buying the World. Lixia Loh (PhD) aims to clarify the nature, strategies and investment holdings of SWFs to enable policy makers and academics to make reasoned judgement on the significance of this fast-growing phenomenon. Since, the comparatively recent massive growth of SWFs coupled with the complexity and opaque nature of their strategies and investment holdings has given rise to concern at the highest level in many western countries.

SWFs are not a new phenomenon. They were introduced in 1950s but little research has been done on them. Despite their long history, it is only until few years ago that they became of interest to investors, policy makers and academics. The Kuwait Investment Fund was the first SWF set up in 1953 to invest the revenue from its oil industry (Page 1).  Many other SWFs have been set up ever since, most of these funds were set up to invest revenue from commodity exports. Due to the success of the Abu Dhabi Investment Authority (ADIA), Norway’s Government Pension Fund-Global and the Government of Singapore Investment Corporation (GIC), countries with excess foreign reserves from either sale of commodities or exports have set up similar funds, thus resulting in the unprecedented growth in the assets under the SWFs management. Non-commodity SWFs are largely funded by excess foreign reserves and budget surpluses. Singapore was the first country to set up a SWF using its fiscal surplus, with Temasek Holdings established in 1974. Initially, most of these funds were set up using revenue from commodities, particularly oil. But over the years more funds were set up using a country’s fiscal surplus and foreign reserves.

The term “Sovereign Wealth Fund” was coined by Andrew Rozanov of State Street Global Advisors in 2005 to describe the investment funds created by nations. The US Treasury defines SWF as a government investment vehicle funded by foreign exchange assets and managed separately from official reserves.  Despite the many definitions of SWFs, they generally share the following characteristics:

  • They are owned by a sovereign government.
  • They are managed separately from the sovereign central bank, ministry of finance and treasuries.
  • They invest in a portfolio of assets of different risk profiles.
  • They have a long-term investment horizon.
  • Unlike pension funds, they have no explicit individual liabilities.
  • They can either operate as a separate legal entity from the government or they can legally be part of the government or central banks.

It is fairly arbitrary to estimate the size of SWFs. They are hindered by the fact that most of these funds do not publish the value of the assets they have under management. A report by the Monitor Group in 2008 stated that the value of SWFs is estimated to be between US$1.9 trillion and US$ 2.9 trillion. In general, most SWFs share similar characteristics but they are heterogeneous group with different policy objectives. The main objective of SWFs identified by IMF are; stabilization of fund, saving funds, reserve investment corporations, development funds and pension reserve funds. However, the lack of transparency and international rules to regulate the SWFs has raised concerns regarding their activities and motives. A lot of concerns have risen mainly due to the lack of information and understanding about SWFs.

SWFs can exist as separate legal entities from the state or the central bank, or they can fall within a pool of assets managed by the central bank, statutory agencies or the ministry of finance. They can be established under specific constitutional laws, general fiscal laws or under the central bank law. To gain a better understanding of the structure of SWFs, five large SWFs are examined (Page 19).

Investment abroad allows SWFs to achieve diversification from their domestic economy and achieve a potentially higher rate of return in international markets (Page 77). However, Dr. Loh describes a trend in Page 80 which indicates that the SWFs have slowed down their activities due to the global economic downturn and the uncertain future in the developed markets. To some SWFs such a move is necessary to help domestic firms which are having difficulties in raising capital. For example, China’s CIC (China Investment Company Ltd) has been actively involved in reviving domestic firms and invested $ 20 billion to recapitalize the Agriculture Bank of China,   whereas the SWFs of France, which was set up specifically to help local firms, has taken an 8 percent stake in Valeo SA, France’s second largest car parts maker.

The political debate on SWFs has witnessed a shift with SWFs moving from investing in sensitive sectors to ones with less political involvement, but nonetheless investment in consumer goods and manufacturing is fairly limited. Dr. Loh however summed up the explained investment policies and activities of SWFs in the book that; the main objective of the heterogeneous SWFs can be divided into two broad categories: Income transfer and wealth creation (Page 88-101).

From page 117 to 167, which is chapter 4, the author provides an overview of the investment policies of SWFs, their investment by countries and by sector, choice of investment strategies and the regulations that these funds face in their overseas investments. The author examines the investments of five of the largest SWFs namely; Abu Dhabi Investment Authority (ADIA), China’s Investment Company (CIC), Government of Singapore Investment Corporation (GIC), Singapore’s Temasek Holdings, and Government Pension Fund-Global (GPFG-Norway) in greater details. Of the five, UAE’s ADIA is the biggest SWF in asset value and has been the most active in terms of its investment and its quest to build itself into an international investment house.

The author shows in the last chapter the future development of SWFs. As SWFs are buying up global companies, the speed of their growth is faster than that of any other investment vehicles. While other investment vehicles have shrunk significantly due to the financial crisis, SWFs have defied the economic uncertainty and how a more prominent presence have in the financial sector. The general market consensus is that the size of SWFs will have sustained growth and the number of new SWFs is likely to increase over the years. The projected growth estimated by Deutsche Bank shows that SWFs will grow steadily over the years at an average rate of 15 percent per annum. Many other industry players, academic researchers and policy makers believe that SWFs will become a dominant force in the global financial markets, helping to shift economic power from the West to the East.

 Reviewer’s observation

Tanzania can set and establish its own Sovereign Wealth Fund and invest revenue from its commodity exports. For example, with high growth in the tourism and extractive sector, revenue collected there can be invested in the global and emerging markets across the world for the sake of future generation.

Japhet Lutambi is a PGD student in Economic Diplomacy at Mozambique-Tanzania Centre for Foreign Relations. He is also a Member of UONGOZI Institute’s Resource Center.

Disclaimer: The views and opinions expressed in the above article are the views of the author and do not necessarily represent the views of UONGOZI Institute.

One thought on “Book Review: Sovereign Wealth Funds – States Buying the World

  1. Thank you for this review. I believe that SWFs are indeed an intriguing issue, but I believe that for Tanzania there is still a lot of investment that is needed and so investing abroad is not a suitable strategy at this stage of our development. Countries with SWFs are all in positions whereby their economies are reaching the absorptive capacities of their economies… we should need see SWFs as a status symbol or marker of progress. In UI’s interview with Knut Kjaer (see http://uongozi.or.tz/videos/in-focus-sovereign-wealth-funds/) he specifically outlines some key contextual considerations for how, why and when to look into sovereign wealth funds.

    I believe that the best service we can do for future Tanzanians is not to invest overseas, but to invest in the real existing deficits that our society is working to overcome – roads, healthcare, electrification, etc. It is only once we have reached a sufficient level across the board that we should then consider mobilising our ‘excess’ capital into SWFs.

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