Founded in 2005 to increase national wealth and contribute to the growth of Korea’s finance industry
Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets. The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.
“A sovereign wealth fund is a government investment vehicle funded by foreign exchange assets which manages those assets separately from official reserve.”
U.S. Treasury Department (2007.6)
“Sovereign wealth funds (SWFs) are defined as special purpose investment funds or arrangements, owned by the general government.
Created by the general government for macroeconomic purposes, SWFs hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.
The SWFs are commonly established out of balance of payments surpluses, official foreign currency operations, the proceeds of privatizations, fiscal surpluses, and/or receipts resulting from commodity exports.”
IMF working definition (2008.10)
Though sovereign wealth funds (SWFs) have been around for decades, they have only fairly recently caught the public’s attention. The 2008 credit crisis highlighted the role of SWFs as liquidity providers for global financial markets. A number of SWFs participated in the stabilization of their own domestic markets during the crisis and retreated from international markets throughout 2008 and early 2009. Since then, SWFs have gradually increased cross-border investments. According to the Sovereign Wealth Fund Institute, the assets under management (AUM) of the world’s SWFs total USD 7.5 trillion (as of Dec. 2019). SWFs funded by oil, or other commodity exports, totaled USD 3.9 trillion at the end of 2015, or 52% of overall SWFs’ assets. Non-commodity SWFs, funded by asset transfers from foreign exchange reserves, current account surpluses, pension reserves or privatization revenues, totaled USD 3.6 trillion. Non-commodity funds are likely to capture an increasing share of total SWFs’ assets as FX reserves continue to rise particularly in emerging markets, and some monetary authorities conclude that their FX reserves are in excess of immediate needs.
The investment strategies of SWFs differ depending on their objectives and constraints. SWFs tend to take a longer-term approach to investing, as they do not need to meet liability needs. Assets managed by SWFs are generally invested with a higher risk tolerance than those by central banks, pension funds, etc.
However, as the asset pool of SWFs has continued to grow in size and importance, so has its potential impact on financial markets. Recipient countries have expressed reservation about SWFs’ lack of transparency, voicing concerns about possible political, rather than commercial, motivations behind their investments and the potential for increased market uncertainty with their growing influence.
The substantial size and high liquidity of SWFs’ assets have important investors. Their investments have been beneficial to global financial markets in terms of increasing market liquidity and financial resource allocation. However, recipient countries have express reservations about possible political, rather than commercial, reasons behind SWFs’ investments, and this has led to the formation of the International Working Group of Sovereign Wealth Funds (IWG), with the IMF providing support. In 2008, the IWG published a set of voluntary principles at a summit in Chile. The Generally Accepted Principles and Practices for Sovereign Wealth Funds (“GAPP”), also known as the Santiago Principles, provide common standards regarding transparency, independence and governance. The IWG met in Kuwait in April 2009 and reached a consensus (“Kuwait Declaration”) on the establishment of the International Forum of Sovereign Wealth Funds (IFSWF).
The International Forum of Sovereign Wealth Funds (IFSWF) was established by the International Working Group of Sovereign Wealth Funds. IFSWF is a voluntary group of SWFs that meet regularly to exchange views on issues of common interest, facilitate an understanding of the Santiago Principles and SWF activities. Recent Annual Meetings were held in Juneau, Alaska (2019) and Marrakesh, Morocco (2018).
◎ The Santiago Principles
The Santiago Principles are a set of 24 voluntary guidelines, a set of generally accepted principles and practices (“GAPP”), for SWFs. It was drafted at an IWG meeting in Chile in 2008.