Analysis: Sovereign Wealth Funds – Wealth of nations

How do governments invest their own wealth and why is it such a controversial area, asks Don Brownlow

Source: IBSJ Wealth Management Supplement – November 08

Middle Eastern and Chinese investment into the US banking system has been widely reported. How have those investments faired during the current banking turmoil, where did the money come from and who are behind this type of government investments?

Back in 1960, when Kuwait placed some of its newly found oil-wealth into an investment fund and called it the Kuwait Investment Authority, it didn’t know that it had just created one of the first international Sovereign Wealth Funds. Depending on how they are counted and which are included, there are now around 40 of these state investment vehicles. By conservative estimates, at the end of 2007, they controlled $3.3 trillion – more than the total amounts in hedge funds and private equity combined. Of the 40 or so funds out there, twelve have been formed since 2005. Governments are now controlling an increasing share of international wealth.

Although some of these funds are new, many of these state investment vehicles have been around for a lot longer than the term Sovereign Wealth Funds (SWF) which was coined to describe them. There are still on-going scholarly debates as to a definition of exactly what constitutes an SWF, but John Nugée, managing director, State Street Global Advisors, offers a simple working definition: ‘SWFs are sovereign-owned asset pools that are neither traditional public pension funds nor reserve assets supporting national currencies’. There are many other definitions but most allude generally to ‘special purpose investment funds owned by governments’. Nugée told a briefing earlier this year that ‘some funds don’t want to be known’ as an SWF ‘because of the bad press’.