Growing Importance of Soverign Wealth Fund

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Hello, readers! The topic what I brought you today is Sovereign Wealth Fund(SWF). On March 18, there was a meeting on how to manage SWF and it was the first time for Korea to open a forum on this topic. In this meeting, the role and importance of SWF as a state’s investment strategy was discussed. Apparently, SWF is getting a lot of attention and I thought it would be nice if we learn about SWF from the basics. Aren’t you excited to know what SWF is? I hope you are. 🙂

swf

Sovereign Wealth Fund is set-aside money for investments, owned by government. SWF invests in not only financial securities, such as stocks and bonds but also real-estate, resources and raw materials, etc. There are two types of SWF, non-commodity funds and commodity funds. Non-commodity funds are financed by government finance, bonds or foreign reserves which are accumulated by trade surpluses. Singapore’s SWF applied to this non-commodity fund category. In contrast, commodity fund is financed by export of raw materials. Most well-known commodity funds are China’s ‘SAFE Investment Company’ and Singapore’s ‘Government of Singapore Investment Corporation’. Norway’s SWF, ‘Government Pension Fund’, toped the global rank with the asset of $715.9, followed by UAE’s ‘Abu Dhabi Investment Authority’ and China’s ‘SAFE Investment Company’. Korea’s SWF was ranked 19th in asset under management volume. It dates back to 2005 when the Korea Investment Corporation was established under the purpose of enhancing sovereign wealth in order to develop domestic financial industry. And it is surely growing at a fast pace.

swf-table

As economic situation changes, method of investment changed as well. Before the 2008 global financial crisis broke out, lots of SWFs had tended to invest in financial assets, such as Merrill Lynch, Morgan Stanley, or Citi group. However, since the global financial market crashed in 2008, the asset size of non-commodity fund has been increasing and now it accounts for 58% of total SWF as of March, 2013. It seems that this trend will go on, resulting from growing uncertainties of financial assets.

Then, what are the views of SWF? Its asset size has been increasing and it is a consensual opinion that the importance of SWF in the world financial market is going to be greater. “From the viewpoint of international financial markets, SWFs can facilitate a more efficient allocation of revenues from commodity surpluses across countries and enhance market liquidity, including at times of global financial stress,” said the IMF’s First Deputy Managing Director John Lipsky.

So far, we have briefly learned about what SWF is and its outlook. We need to keep an eye on the possible changes in capital market, resulting from growing importance of SWF.

Best regards,
Seok Won, Kwon (seokwonkwon89@gmail.com)

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