A way to make sense of SWFs

Altogether the SWF Institute counts more than 70 SWFs operating in nearly 50 countries, at least eleven of which have formed since 2011, according to an October 2013 paper by Daniil Wagner, student and research assistant at the Justus-Liebig-University of Giessen, Germany. Well over half (59 percent) of the money in SWFs ultimately derives from the extraction of oil and gas from the ground.

Among the biggest SWFs listed on the SWF Institute website are the $818 billion Government Pension Fund-Global in Norway, the $676 billion SAMA Foreign Holdings in Saudi Arabia, and the $627 billion Abu Dhabi Investment Authority. Such SWFs, defined by the institute as state-owned investment funds fed by the proceeds of resource exports or other sources, can be categorized as follows, according to the paper:

  • Intergenerational wealth transformation: SWFs funded by the sale of oil and other natural resources and whose purpose is to help diversify the economy (such funds are often found in countries with significant natural resources but a relatively small population); 
  • Strategic investment: Ones earmarked for investments designed to make sure resources or technology remains available to citizens (China is a good example of a country with a SWF earmarked for this purpose, according to the paper);
  • Intergenerational wealth accumulation: Ones whose main object is to grow in size and become a source of wealth and income for posterity, much like pension funds.

As a general rule SWFs are long-term investors, and they’ve been showing more interest in real estate of late, as well as in applying environmental, social and governance criteria to their investments. Those dependent on natural resources for funding often try to hedge against the price of commodities, such as by picking assets classes whose returns are less correlated with those of commodities. But beyond that each of the three groups has its own characteristic approach to asset allocation, according to the paper. Both wealth transformation and wealth accumulation groups, for example, invest with an eye toward their “obligation to increase or at least to preserve the capital stock.” Meantime, the strategic investment group tends to be “very opportunistic” and to engage in “opaque transactions” that make it hard to understand the investment process.