Headline: What is  a Sovereign Wealth  Fund?

Date: 6/12/2021

Body:  I was enjoying an excellent podcast in a series called “Explaining Economics” and despite the moribund-sounding title, I was enthralled.  (I already postulated that I am confirmed geek.)  But, in the process of explaining the economics of some Asian countries, the host said something about “sovereign wealth funds.”   I had never heard of this beast before, so, I thought this bears some investigation.

What is a Sovereign Wealth fund?

A Sovereign Wealth Fund is a state-held fund where they can store their surplus revenues.   The funding sources of such a fund can be various, but there is usually a targeted purpose of the fund.  Whatever the purpose, the effect is a benefit to that nation and its citizens.  Most often, these can be referred to as stabilization funds or Reserve investment funds.   These funds are often used to diversify the revenue streams of different countries.   For instance, if you live in a country with not too much in the way of development, but you have a great wealth in rare earth metals.  In this case you might take a portion of your revenue from sales of rare-earth metals and place it into the Stabilization fund.   If there is another large discovery of rare-earth metals, you could then depend upon the stabilization fund until the price of rare-earth metals improved.  Importantly, when private enterprises see that the government is willing to make large investments, they are incentivized.  Per one official of the Norwegian fund,

“We think we have a competitive advantage in that we’re a large fund that can write a large check. This [renewable energy] is an area where we see a lot of opportunities going forward. For the fund, we see the diversification it can give us,” Mie Holstad, chief real assets officer at NBIM, told FT.

 Why should you care?   Because these funds can be gargantuan and sometimes the accounting for these funds can be quite opaque.

That’s all well and good, but, can you give us a few examples?

Of course.

Fund NameFund BalanceFund Purpose
Norway Government Pension Fund Global$1,073,590,000,000Funded by petroleum sales, it invests mainly in equity positions, with the objective of funding a state-retirement system.  Many of the equity positions are to support development of clean energy opportunities.
China Investment Corporation$940,604,000,000This Corporation was setup in 2007 by issuing bonds.  Their current balance comes mostly from currency exchange.  Interestingly, as of January 2021, 45% of this fund is invested in “alternative assets.”  (Think “other than stocks and bonds.)  Also note that this is far from the only Sovereign Wealth Fund owned by China.
Abu Dhabi Investment Authority$579,621,120,000 
Kuwait Investment Authority$533,650,000,000 
Hong Kong Monetary Authority Investment Portfolio$528,054,000,000 

As large as these numbers are (and they are objectively LARGE) the Social Security Trust Fund in the US is another example, weighing in at over $2.9 Trillion.  Some context is always helpful to keep perspective.

The Verdict

Sovereign Wealth Funds are important because they are so immensely large.  If I invest in the market, my $1,000 at a time will not make much of a change in that market.  But, if the Norwegians or somebody else (and there are many) invest their $Billions, that can genuinely move a market.  So, the take-home point here seems to be 2-fold:

  1.  Don’t be overly scared of august-sounding names with the word “fund” after them.   You can understand them enough to see how they work within a market.    If you weren’t smart, you wouldn’t have read this far.
  2. These are immensely large funds.   This is important in moving markets within the stock market, for sure.   But, perhaps more important, they can serve as potent tools to push forward social change and scientific advancement.   I would argue that these are both items to support.







Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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