Today’s issue covers Sovereign Wealth Funds (SWFs).

Tomorrow’s issue will explore the concept of Rainforests and the Three Basins.

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The Wealth of Nations

Over the past 70 years, a new type of financial institution has emerged: sovereign wealth funds (SWFs). Some of these entities are worth over a trillion dollars, and they play an increasingly important role in both geopolitics and the global economy.

While they started as a way for energy-rich nations to invest the money made from the sale of oil & gas, they have evolved into a broader vehicle by which nations can invest in their future.

So, what are Sovereign Wealth Funds?

SWFs are state-owned investment pools that manage a country's reserves, often generated from commodity exports, foreign exchange reserves, or other sources of national income. The primary objectives of sovereign wealth funds include preserving and growing wealth for future generations, stabilizing national economies, and supporting strategic investments that align with a nation's long-term goals.

As of 2017, there were 79 SWFs managing $7.3 trillion dollars combined. Here are some of the largest SWFs:

A Brief History of SWFs

The first sovereign wealth fund, the Kuwait Investment Authority (KIA), was established in 1953 following the discovery of oil in Kuwait. Kuwait’s leaders sought a mechanism to manage their country’s newfound wealth responsibly. The KIA initially focused on passive management, aiming to safeguard surplus oil revenues for future generations by investing in conservative, low-risk assets.

The subsequent decades witnessed the proliferation of SWFs, primarily in oil-producing nations. The 1970s oil crisis fueled an unprecedented surge in oil prices, leading countries like Saudi Arabia, the United Arab Emirates, and Norway to establish their sovereign wealth funds. These funds were designed to address the challenge of managing large foreign exchange reserves generated by booming oil exports, with the aim of mitigating the economic impact of volatile commodity prices.

During the 1990s, countries with trade surpluses and robust economic growth sought to diversify their holdings with SWFs. The 2000s were characterized by a surge in global financial markets, prompting SWFs to become more active and sophisticated investors.

The emergence of Asian SWFs, particularly the China Investment Corporation (CIC) in 2007, signaled a new era where these funds began to play a more significant role in international finance.

Different Types of SWFs

The International Monetary Fund (IMF) has identified five types of SWFs:

1. Stabilization funds:

   Usually in natural resource-rich countries that seek to protect their economy from changes in commodity prices. They typically pursue conservative investment strategies focused more on bonds than stocks or alternative assets.

2. Savings funds:

   Similar to stabilization funds, except that they're designed as long-term vehicles for building wealth for future generations and preparing for the exhaustion of natural resources like oil.

3. Reserve investment funds:

   Usually based in countries that aren't natural resource-rich. These SWFs are largely financed by the “accumulated foreign currency reserves that result from large trade surpluses and privatization" of public entities. These funds often pursue riskier investment strategies.

4. Development funds:

   Development funds are focused primarily on investing in local infrastructure, human welfare, and domestic industrial projects. These funds look to invest money in their own country instead of foreign financial assets and companies in other countries.

5. Contingent pension reserve funds:

   These funds are designed to provide future national governments with the money needed to pay pension obligations. Australia’s Future Fund and New Zealand’s Super Fund are prime examples.

   

   The assets held by Australia’s Future Fund

The Future of SWFs

Smaller countries, especially in Africa, have launched SWFs in recent years in an effort to chart their economic future. These SWFs could help the countries to develop their economy by providing capital for domestic industry and infrastructure. These SWFs have different mandates than other SWFs, with a special emphasis on attracting private capital to the country and catalyzing or supporting investment in local industries.

It remains to be seen whether SWFs will help these countries to grow their economies and attract foreign investment, but it is encouraging to see more countries adopting the SWF model in an attempt to provide for their people — today and in the future.

Bonus Reading:

☘️ Ireland plans to create a $100B SWF called the Future Ireland Fund. Click here to learn more about how it will work.☘️

ART OF THE DAY

Thank you for reading. Please reply to this email if you have any thoughts or feedback.

Yours,
Dan