Sovereign wealth funds (SWFs) are becoming increasingly involved in private capital markets, with growing AUMs and rising investment sophistication. Just one example of how large these funds can be, the Norway Government Pension Fund Global manages over $1 trillion. Often with the goal of bringing stability or long-term economic stimulus to a nation, these investment vehicles are critical to the future well-being of a country. But what are the funding sources for these important funds and how does that affect how they operate?
Excess natural resource revenues
SWFs from countries that rely heavily on capital from natural resources (often oil & gas, though sometimes minerals) typically aim to make up for a lack of future income as natural resource reserves are depleted. Managed with the idea of creating a multigenerational source of capital, SWFs of this type are often savings funds—which make up the bulk of AUM for sovereign wealth funds overall.
In addition to savings funds, SWFs that use excess natural resource revenues to fund their investments are sometimes designated as stabilization funds. Designed to mitigate the volatility on a government’s finances that may be present because of price swings in natural resource markets. These funds can be used to strategically move capital between the SWF and the government based on economic conditions. Since stabilization funds are more reactionary than savings or development funds, their investment portfolio needs to hold a higher portion of liquid investments, allowing them to stay flexible.
A few examples of SWFs funded by excess natural resource revenues include:
- Norway Government Pension Fund Global
- Abu Dhabi Investment Authority (ADIA)
- Saudi Arabia’s Public Investment Fund (PIF)
- Alaska Permanent Fund
- Chile’s Economic and Social Stabilization Fund
Foreign exchange (FX) reserves
Foreign exchange reserves are held by a country’s central bank and include foreign currencies and other assets such as government securities. Some sovereign wealth funds dip into these reserves as a source of capital, though additional funding may come from excess tax revenue and issuing bonds. Unlike SWFs that are meant to offset revenue from finite natural resource reserves, FX-funded SWFs generally aim to provide economic benefits in the near term as well as the long term. Most of the largest FX reserve funds are in East Asia—with China, Hong Kong and Singapore each managing funds with over half a trillion dollars.
A few examples of SWFs funded by FX reserves include:
- China Investment Corporation
- Hong Kong Monetary Authority Investment Portfolio
- GIC Private Limited
- Temasek Holdings
Want to learn more about sovereign wealth funds? Download our analyst note that covers different fund types and key players in more detail.
