By Bala Aditya and Sunil S
What if, when you were investing in the market, you weren’t competing against another person, or a company, but rather, an entire country? Well, turns out that is a real possibility. A sovereign wealth fund (SWF) is a state-owned investment fund or entity which comprises of pools of money derived from a country’s reserves. To break down a verbose definition, a country pools together its resources to invest in various facets of the economy. The funding comes from taxes, the country’s resources, currency options and transfer payments, primarily, and countries usually have a specialized body to work out the best investment strategies for their economy. But while the investment strategies may differ, with some ensuring more liquidity, as an example, the main reason for SWFs is diversification. The United Arab Emirates relies heavily on oil for its wealth. Therefore, the SWF of the country acts as a shield for its economy, in case oil prices drastically drop. Japan’s SWF bolsters its social security net. Japan’s Government Pension Investment Fund serves to increase the amount demarcated for its public pension system. In some cases, funds may invest indirectly in domestic industries because these funds prefer returns over liquidity and they have higher risk tolerance compared to traditional foreign exchange reserves.
Each sovereign fund has its own objective of creation and each one is profitable in its own way.
Here are some common objectives:
- Protect & stabilize the budget and economy from excess volatility in revenues/exports
- Diversify from non-renewable commodity exports
- Earn greater returns than on foreign exchange reserves
- Assist monetary authorities dissipate unwanted liquidity
- Increase savings for future generations
- Fund social and economical development
- Sustainable long term capital growth for target countries
- Political strategy
There are a lot of laws which govern different sovereign wealth funds and they vary from country to government. Some of these laws are:
- Constitutive Law
- Fiscal Law
- Constitution
- Company Law
Although these funds seem profitable, there have been cases of cheating and scams. Here is one famous scam which made it to the headlines:
Goldman Sachs had arranged about 6.5 billion USD worth of bonds for 1MDB which is a Malaysia’s state investment company and it turned out as a loss for 1MDB.
Goldman Sachs Group Inc. is facing its first criminal charges involving bond sales that it arranged for Malaysia’s state investment company 1MDB. The scandal surrounding the fund has reached around the globe to result in dozens of charges against politicians, bankers and financial institutions, as well as investigations in at least 10 countries.
1MDB was supposed to finance development in Malaysia, which is now seeking to recover $4.5 billion allegedly siphoned from the fund.
REFERENCES
https://www.investopedia.com/terms/s/sovereign_wealth_fund.asp
