1. Sovereign Wealth Funds
Date: 12062008
Second year MiM Stream 2
Group A2

2. Executive summary
Group A2
International financial markets
Current impact of SWF on financial markets
 SWFs managing the foreign assets of national states have become a significant class of global
investors, with assets between $2 and 3 trillion. Sustained accumulation of foreign assets
could transform several SWFs into important market players as their financial assets under
management could soon exceed those of the largest private asset managers and pension funds.
 The policy issues arising from the emergence of SWFs as large global financial players range from
concerns over a lack of transparency and a reversal in privatizations to risks to global
financial stability.
 For example, SWFs could contribute to an unwinding of global imbalances through a diversification
out of US dollar- denominated government bonds in which the bulk of traditional reserves is
invested.
 Another concern relates to the question of whether such funds might distort asset prices through
non-commercially motivated purchases or sales of securities.
 Over the longer run, any impact of SWFs on global financial market structure and stability will
depend critically on the motives underlying the investment decisions of such funds. While fully
return and risk-motivated investments may affect financial stability rather positively due
to the long-term investment horizon of such funds, non-commercial motives might have a
negative impact on financial stability.
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3. Agenda
Group A2
International financial markets
II Assets under management and latest transactions
III Where the wealth is coming from and how is it grown?
IV Sources of SWFs' assets
V Investment objectives vs. Risk tolerance: a comparison of different SWFs
VI Transparency rating and political issues
VII The role of SWFs during the last year in the financial markets
VII Analysis of a commodity SWF: ADIA
IX Analysis of a non commodity SWF: Temasek
X What can be done to enhance SWF’s in the future?
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4. Introduction
Group A2
International financial markets
Not a new concept Legal Basis
Definition
1950 Today
 “Kuwait Investment Board
was set up with the aim of KIA
Brunei Inv. Stabilization
CIC  Either SWFs are separate legal entities
Fund
established under specific constitutive law or a
Authority
$250 b, 1953 $200 b, 2007
investing surplus oil (Kuwait)
$30 b, 1983 $200 b, 2004
(China)
revenues to reduce the
(Brunei) (Russia) private corporation governed by company law.
reliance of Kuwait on its Temasek
Norway Govt.
QIA
Saudi Arabian  Or they are not separate legal entities and are
finite oil resource”. $108 b, 1974
Pen. Fund
$328 b, 1990
$60 b, 2005
Funds
$250 b, 2007 managed as an agency within the government or
(Singapore) (Qatar)
 Special purpose investment (Norway) (Saudi Arabia) by the central bank.
funds or arrangements Khazanah
ADIA Future Fund
owned by the general $875 b, 1976
Nasional BHD
$42 b, 2006
government; (UAE)
$18 b, 1993
(Malaysia)
(Australia)
 whose purpose is to hold,
manage, or administer GIC KIC LIA
$200 b, 1981 $20 b, 2005 $40 b, 2007
assets to achieve financial (Singapore) (Korea) (Libya)
objectives;
 employ investment World presence Primary Objectives
strategies which include
investing in foreign
financial assets;  Most SWFs are set up to provide savings for
 are commonly established future generations or fiscal stabilization or both.
out of BOP surpluses, Their primary objective is long-term returns /
official foreign currency United States
effective management of entrusted assets
Alaska Norway
operations, privatization
Russia
Ireland
For some SWFs with future expected
Canada
proceeds, fiscal surpluses Azerbaijan Kazakhstan 
expenditures (i.e. pension reserve funds) the
South
and/or commodity export
United States Korea
KuwaitIran China
Bahrain
receipts. Mexico
Libya Qatar
UAE
Saudi Arabia
Oman
primary objective is to provide for these future
costs.
Vietnam
Trinidad and Tobago
Venezuela Malaysia Brunei
Sao Tomé and Principé Singapore Kiribati
 Policy objectives are usually publicly disclosed
Equatorial Guinea
Gabon
Timor Leste
Chile
Angola
Botswana
Australia
New Zealand
 Generally do not engage directly in macro
polices.
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5. Assets under management and latest transactions
Group A2
International financial markets
Global Financial Assets ($ T) SWFs are in Increasingly High Profile
 Sovereign Wealth Funds Transactions
(“SWFs”) are a
prominent investor class
Asset Management Industry AUM $48,1
with their assets rivaling
Global Hedge Funds and Retirement Funds AUM $23,6 $9.75 b, Dec 07 $8.83 b, Nov 05 $7.5 b, Nov 07 $6.88 b, Jan 08
Private Equity combined *
 Not all SWFs are created Projected Sovereign Wealth Funds $7.5 - $10.0
equal as they lie along a
spectrum of risk appetite Foreign Exchange Reserves $5,4
 SWFs are hiring best-in- Sovereign Wealth Funds $3,0
China Investment China Investment
class investment talents
Corp Corp
$5.19 b, Aug 07 $5.00 b, Dec 07 $4.40 b, Dec 07 $3.00 b, May 07
to serve long-term Hedge Funds AUM $1,9
investment goals
 Governments are Private Equity AUM $1,3
weighing perceived
threats of SWFs against Assets Under Management($ b)
potential benefits.
Managing political risk in
SWF-related
transactions is key
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6. Where the wealth is coming from and how is it grown?
Group A2
International financial markets
World current account balance trends ($ b)
 Surge in commodity prices
 Dramatic increase in
current account surpluses 1,200
in Asia
800
 Willingness of
governments to allocate
400 US
more funds from Foreign
Exchange Reserves to Euro
0
Sovereign Wealth Funds Asia
1997 1999 2001 2003 2005 2007
 A reallocation of excess -400 Oil exporters
reserves would trigger net
capital outflows out of US -800
assets at an order of
magnitude of around USD -1,200
500 billion
 The counterpart of these
Global Current Account Balance 2007
net outflows from the
United States and the euro
area are mainly Japan and
emerging economies, Deficits Surpluses
reflecting the relatively
large weight of these
countries in global capital Western
Hemisphere
markets compared with $20B
Russia /
their negligible role as
Other
Advanced CIS
reserve currencies.
US $77B Asia (ex-
$19B
$784B Japan)
Middle $480B
C&E Japan
Eurozone East
Europe $195B
$227B
$120B $21B
Global Current Account Balance 2007
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7. Sources of SWFs’ assets
Group A2
International financial markets
Oil exporting countries’ foreign investments SWFs of resource rich countries
assets (% share, end-2007)
Central
Banks High Net This group of countries that have established SWFs are
reserve Worth 100% having benefits from high oil and commodity prices. The
assets Individual function of SWF of these countries are:
Total: USD 4,1 trillion 13% s 80%
 stabilizing government and export revenues which
39%
60% would otherwise mirror the volatility of oil and
commodity prices.
40%
 the accumulation of savings for future generations as
20%
natural resources are non-renewable and are
anticipated to be exhausted after some time.
0%
SWFs
48%
Oil Other
Official foreign exchange reserves SWFs of FX currency rich countries
% share, end-2007
100% This group of countries, most notably in Asia, has established
Asian official SWFs because reserves are being accumulated in excess of
SWFs FX reserves what may be needed for intervention or balance-of-payment
80%
19% not in
purposes. The source of reserve accumulation for these
Sovereign
Wealth countries is related to the management of inflexible exchange
60%
Funds rate regimes. As the authorities have become more
44% comfortable with reserve levels, foreign assets have been
40% moved to specialized agencies which often have explicit
return objectives and may invest in more risky assets than
20% central banks.
Total: USD 6,5 trillion Rest of
world 0%
official FX
reserves FX Reserves Other
37%
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8. Investment objectives vs. Risk tolerance: a comparison of different SWFs
Group A2
International financial markets
Strategic Behaviors
 SWFs have undertaken
Low Risk Tolerance High
substantial investments Stabilization
Cash
across national borders / Strategic
 The great majority of Gov’t Fixed Stake Real Hedge Private Leveraged
sovereign funds are Examples Bonds Income Equity Building Estate Funds Equity Buyouts
passive investors.
Russian
 unlike hedge funds and Stabilization
private equity funds, SWFs Fund
typically are not highly
Investment Objective
Norwegian
leveraged institutions
Government
 The bulk of SWF Pension Fund
investments have been
concentrated in developed Abu Dhabi
Investment
countries; Southern
Authority
countries (particularly in
Asia) are a relatively new Kuwait
investment destination Investment
Authority
 since SWFs have no
explicit liabilities, they
usually have a long-term Temasek
investment horizon
combined with a high
Qatar
tolerance for risk. They Investment
therefore tend to invest in Authority
illiquid and higher-yielding
risky instruments property
and securities that are not
actively traded Wealth
Accumulation
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9. Transparency rating and political issues
Group A2
International financial markets
How to improve transparency
The growing importance of
SWFs raises a number
international policy issues:  Imposing reporting requirements on holdings thresholds
 State-controlled foreign  Applying market integrity rules to govern insider
investments may be trading, fiduciary responsibility, and the like
sensitive both from a  Subjecting investments in supervised financial
political and economical institutions (e.g., banks, insurance companies) to
prudential rules
perspective, as the lack
of transparency of SWFs  Imposing possible restrictions or approval requirements
on funds that attempt to increase holdings beyond
causes concerns about
some level
the motivation of these
 Using special agencies to review investments based on
funds’ investments,
national security considerations (e.g., Committee on
aggravating protectionist Foreign Investments in the U.S.)
pressures.
 Restricting investments based on national security or
 The G7 stated that any public order
restrictions on SWF  Subjecting investments in certain sectors of social
investments should be importance to special laws
minimized and only  Scrutinizing SWFs for anti-monopoly or take-over
“apply to very limited restrictions
cases which primarily
concern national How to evaluate a SWF: the Truman’s scoreboard
security”.
It is possible to classify SWFs by analyzing 4 their main features:
 Structure (information about funds provenience, goals, strategy, fiscal treatment, separation from national reserves)
 Governance (role of government and management, presence of corporate responsibility policies,
 Transparency and Accountability (annual and quarterly report, information on investments and their returns)
 Behavior (information on the speed and nature of change of strategy caused by market changes)
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10. The role of SWFs during the last year in the financial
markets
Group A2
International financial markets
 At the beginning of 2007
Western banks were the
undisputed leaders of
global finance.
 ABN AMRO was bought by
a consortium of leading
European banks led by
RBS
 Barclays escaped to be
nationalized it now has a
consortium of government
affiliated investment
vehicles from Qatar and
UAE as its controlling
shareholder.
 Citigroup has received
numerous capital injections
from SWFs in Asia and the
Middle East.
 The central role these
large financial
intermediaries has been
taken over by
governments and SWFs
 They have provided the
lifeline without which many
of these intermediaries,
and indeed the global
financial system, may well
have collapsed.
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11. Analysis of a commodity SWF: ADIA
Group A2
International financial markets
History Where does it take funds from?
 Established in 1976 as a replacement of the  The Abu Dhabi National Oil Company (ADNOC)
Financial Investments Board created in 1967 part and its subsidiaries pay a dividend to help fund
of the then Abu Dhabi Ministry of Finance. ADIA and its sister fund Abu Dhabi Investment
 It is rumored to be the largest of the Sovereign Council (ADIC)
Wealth Funds.  About receiving 70% of any budget surplus is sent
 It is wholly owned and subject to supervision by to ADIA, while the other 30% of surplus goes to
the government of Abu Dhabi. the Abu Dhabi Investment Council (ADIC).
 The fund is an independent legal identity with full
capacity to act in fulfilling its statutory mandate
and objectives.
Investments by assets classes Main features
Asset classes Assets under management: USD 627 billion
50% Origin: Oil
40% Entity structure: Fund
30% Firm investment style: Mixed*
20% Transparency rating: 3
10%
0%
Private Equity
Cash
Infrastructure
Real Estate
Developed Equities
Governements bonds
Non governments bonds
Small cap equities
Alternative Investments
Emerging markets
equities
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12. Analysis of a non commodity SWF: Temasek (1 of 2)
Group A2
International financial markets
Shareholders return Investment strategy
 Transforming Economies - We invest in industry
sectors that correlate with the economic transformation
of the country
 Growing Middle Class - We find opportunities in
companies and industries whose growth is fuelled by
the increasing purchasing power of the middle class
 Deepening Comparative Advantages - We tap the
potential of competitively-positioned companies
 Emerging Champions - We identify companies proving
to be best-in-class, be it regionally or globally
Investments by assets classes Main features
Assets under management: USD 85 billion
Origin: Non commodity
Entity structure: Corporate
Firm investment style: Portfolio
Transparency rating: 10
Moody’s rating: Aaa
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13. Analysis of a non commodity SWF: Temasek (2 of 2)
Group A2
International financial markets
Attributes
 The success of the
Singapore model can be
ascribed to its proactive
investment style that
emanates from aligning its
investment strategy with
its socioeconomic strategy.
 They are run on a
commercial basis receiving
no special privileges
because they are state-
owned. Government
ownership is exercised
through Temasek
Holdings, a state company,
whose board members and
chairman are appointed,
and performance-based
rewards are sanctioned, by
government
 Temasek Holdings-
managed state enterprises
account currently for about
60 percent of Singapore’s
GDP.
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14. What can be done to enhance SWF’s in the future?
Group A2
International financial markets
Leverage SOEs
Enhance Regional
and International
Cooperation
Mitigate Economic  State owned enterprises
Downturns dominate the economies
Transfer Knowledge  Establishment of joint funds  Opportunities may exist to
through Investments both at the regional and at manage groups of SOEs
the international levels. under one holding.
 Use their wealth in slow Regionally, benefits from  This will allow governments
economic times to spur joint funds include sharing of to reap important business
economic growth and maintain risk and increased investment synergies, as well as
 Support of local economic funding of critical strategic opportunities. economies of scale and
growth strategies through investments. scope.
international and domestic  Internationally, joint funds
 Norway’s SWF, for example, is can facilitate market
investments.
supporting infrastructure penetration and enhance
 International investments the projects in light of the global
understanding of new business knowledge transfer
financial crisis in order to mechanisms.
models, operations, and sustain Norway’s economic
strategies. growth.
 Investments in multinational
corporations help bring in
sought-after technologies and
knowledge
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15. Group A2
International financial markets
Thank for your attention
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