Sovereign wealth funds are pools of investment capital controlled by a government or central bank and invested in economic activities in other countries. The source of this capital is foreign exchange reserves, which all governments keep — typically in widely traded currencies such as the dollar, euro, or yen. When there is a surplus current account balance, as there is in some countries, those reserves can be put into an investment fund and used to increase national wealth or
diversify
sources of revenue.
While the name is relatively new, modern sovereign wealth funds have existed since at least the 1950s. However, sovereign wealth funds have grown in size and number in recent years, as global economic growth has increased the flow of capital into these government-controlled investment pools.
In 1990, sovereign wealth funds controlled an estimated $500 billion in assets. Today, they hold over $3 trillion in assets, and current trends indicate that the funds could amass $12 trillion by 2012. More than 20 governments have sovereign wealth funds, and several other nations are looking into starting them.
Formulas for growth
There are a variety of factors behind the recent dramatic growth of sovereign wealth funds. As countries with oil and gas reserves accumulate huge surpluses based on record energy prices, they’re putting this capital to work in the global investment markets. In fact, over half of the assets controlled by sovereign wealth funds belong to countries that rely on substantial oil and gas exports, including Abu Dhabi, Norway, Saudi Arabia, and Kuwait.
In addition, countries that are heavily dependent on
commodity exports,
such as oil, natural gas, metals, and minerals, use sovereign funds to diversify their economic interests and provide a buffer against the volatility of their revenues. There are sovereign funds invested in everything from government securities to telecommunications and aerospace companies.
Nations that accumulate substantial surplus capital through trade also have sizeable sovereign wealth funds. One important example is China, whose status as a trading powerhouse is bringing in increasing amounts of capital that can be harnessed for international investment. While the five largest funds account for over 70% of the assets invested in sovereign wealth funds around the world, nations as diverse as Russia, Ecuador, Nigeria, Trinidad and Tobago, and Canada have sovereign wealth funds.
