Sovereign Wealth Funds
Where the World's Richest Countries Invest
A sovereign wealth fund is an investment pool of foreign currency reserves owned by a government. The largest investment pools are owned by countries that have a trade surplus, such as China and oil-exporting countries. They take in foreign currencies, primarily U.S. dollars, in exchange for their exports. The funds are then invested to produce the highest return possible.
Sovereign Wealth Funds vs. Central Banks
Before getting into more detail about sovereign wealth funds, it's important to distinguish between sovereign wealth funds and similar—but different—financial entities. Similar funds held by nations' central banks are not sovereign wealth funds because they have different goals. A central bank holds funds to manage the value of its currency, to stimulate the economy, or to prevent inflation. A sovereign wealth fund just wants to earn a high return.
Here are some other funds that may be confused with sovereign wealth funds:
- Funds held by state-owned companies
- Government employee pension funds
- Private wealth funds
How Sovereign Wealth Funds Affect the U.S. Economy
The amount of money held by the largest sovereign wealth funds has more than doubled since September 2007, from $3.265 trillion to $8.1 trillion in 2019. Their asset holdings are now double that of all hedge funds combined.
These funds are big enough to affect overall markets. For example, they took large stakes in Citigroup, Morgan Stanley, and Merrill Lynch during the financial crisis. They contributed to asset bubbles in London and New York real estate. These funds have increasing influence as investors become more sophisticated.
High oil prices spurred the growth of large wealth funds between 2007 and 2014. During that time, nearly 60% of their assets were from oil and gas revenues. The 2008 financial crisis barely slowed their growth. These funds hit $4 trillion in December 2009 and $5 trillion in March 2012.
Sovereign Wealth Fund Ranking
Norway's Government Pension Fund is the largest, according to the Sovereign Wealth Fund Institute. As of November 2019, it held nearly $1.1 trillion. Its profits are from the state-owned North Sea oil-drilling operation, making it susceptible to drops in oil prices.
Middle Eastern Funds
Middle Eastern economies also rely heavily on oil exports. They make up about a third of the total wealth in sovereign funds.
|Top 10 Middle Eastern Funds (in billions)||Country||2019|
|Abu Dhabi Investment Authority||UAE||$696.7|
|Kuwait Investment Authority||Kuwait||$592.0|
|Qatar Investment Authority||Qatar||$328.0|
|Public Investment Fund of Saudi Arabia||Saudi Arabia||$320.0|
|Investment Corp. of Dubai||UAE||$239.4|
|Mubadala Development Co.||UAE||$228.9|
|National Development Fund||Iran||$91.0|
China benefits from a massive export economy that collects large holdings of foreign currency that need to be invested. Export-funded sovereign wealth funds occur in several countries, but the best example may be in China, where there are five sovereign wealth funds. Combined, these funds invest trillions of dollars. China's central bank manages the rest of the government's funds to regulate its currency. State-run corporations and banks invest in these wealth funds as well. Each fund has separate goals.
- China Investment Corp: This fund boasts just over $1 trillion in assets. As of January 2021, roughly 42.5% of this fund's portfolio was made up of "alternative assets" including real estate, infrastructure, and hedge fund investments
- SAFE Investment Company: This fund, with roughly $417.8 billion in assets under management, incorporates three investment entities based overseas. They include the Investment Company of the People’s Republic of China in Singapore, Gingko Tree in the UK, and Beryl Datura in the British Virgin Islands.
- Hong Kong Monetary Authority: With more than $576 billion in assets, this fund invests in the Hang Seng stock market and supports the financial stability of Hong Kong
- China's National Social Security Fund: This fund currently manages $437.9 billion in assets. It manages funds recovered from state-owned businesses and other government investment proceeds. It invests mostly in China.
- China-Africa Development Fund: This fund manages $5 billion worth of assets, all of which are intended to "promote the development of Sino-African commercial ties."
The city-state of Singapore has two wealth funds, holding more than $800 billion in total. The funds come from the high savings and investment rates of the people and businesses in this world-class financial center.
The largest is the Government of Singapore Investment Corporation, now the GIC Private Limited fund. It holds $453 billion. It's owned and funded by the government. It’s subdivided into three smaller enterprises:
- GIC Asset Management: It invests in equities, bonds, foreign exchange, and alternative investments.
- GIC Real Estate: This fund holds properties around the world, as well as investments in REITs.
- GIC Special Investments Private Limited: This is one of the world's largest private equity firms. It invests in leveraged buyouts, venture capital, and infrastructure.
Singapore's other wealth fund is Temasek. It invests $417.4 billion through 120 subsidiaries. It focuses on investments in Asia and energy-related investments. It purchases stocks instead of direct investments. Temasek opened a New York-based office in 2013. Analysts expected that the new Temasek office would come with a change its strategy—from owning small stakes in blue-chip, publicly-listed companies, to major direct investments.