Some of you may have heard me discuss Sovereign Wealth Funds (SWFs)recently. I'd like to start topic on them and pulled from a variety of sources to explain them and some of the issues regarding them. I know this is a bit long so I've tried to highlight the key parts for those that are ADD challenged.
Though you may not be aware of what they are, (think of the Abu Dhabi ports deal) these . .government-owned funds have been getting more attention in the financial press and among the world's top central bankers and finance ministers.
What are they? A Sovereign wealth fund (SWF) is a fund owned by a country (usually its central bank) composed of financial assets such as stocks, bonds, property or other financial instruments. SWFs differs from foreign exchange reserves by maximizing long term return and are not created or used for short term currency stabilization. They're based on current account surpluses and will become less important only if the countries with large surpluses begin to run prolonged current account deficits.
So what's the deal? Sovereign Wealth Funds are huge and I mean enormous. Their estimated $2.5 trillion in assets exceeds the sum invested by the world's hedge funds. Moreover, Morgan Stanley, in a widely cited study, projects that these investment funds could surpass global foreign reserves by 2011 when they each reach $6.5 trillion and be valued at a staggering $17.5 trillion in 10 years. It's said the Abu Dhabi Investment firm takes in $2 billion a day. Putting them in context.... The total value of all traded securities (all bonds and stocks) denominated in US dollars is $50 trillion. For the world, it's $165 trillion. The total value of traded securities in Africa, the Middle East, and emerging Europe combined is about $4 trillion; this is also roughly the size of these markets in all of Latin America.
In the past few months, the SWFs have injected about 29 billion dollars into US financial firms, such as a 10-billion-dollar investment in the UBS by the Singapore Investment Corporation, a 7.5-billion-dollar investment in Citigroup by the Abu Dhabi Authority, a stake of up to 5 billion dollars in Merrill Lynch by Singapore's Temasek and a stake of 5 billion dollars in Morgan Stanley by the newly-founded China Investment Corporation. Two Middle Eastern government funds now own 33% of the London Stock Exchange.
Issues arise...Many remember the issues with the ports deal. Probably the most political turbulence caused by a sovereign wealth fund occurred when Temasek Holdings, the state-owned investment branch of Singapore, purchased a stake in the company owned by the prime minister of Thailand, Thaksin Shinawatra. The deal fed anti-government demonstrations that led to his ouster in a military coup in 2006.
In further response to the perceived threat, a transatlantic defense is gradually mounting. In August 2007, the European Commission launched a probe into the role of SWFs in the European Union (EU). The investigation came after German chancellor Angela Merkel urged the EU to start screening foreign-controlled investments. These concerns have led the EU to consider whether to allow its members to use "golden shares" to block certain foreign acquisitions
A Senate Banking Committee heard lengthy testimony on them in December. The worry is that, beyond the possibility of foreign funds pushing up prices on bonds, stocks and real estate, they might exercise inappropriate control politically or in the private sphere. A government is a different type of animal in the investing world," he said. "We call them sovereign wealth funds, but once you're operating outside your own borders, you're not sovereign in the same sense." A U.S. government agency has begun an investigation of foreign state-run investment funds at the request of a Senate panel, as lawmakers examine whether the much-needed capital infusions being provided to major banks pose economic or security concerns.
Interesting piece on the topic...
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1868
Estimated size of some of the funds.
Though you may not be aware of what they are, (think of the Abu Dhabi ports deal) these . .government-owned funds have been getting more attention in the financial press and among the world's top central bankers and finance ministers.
What are they? A Sovereign wealth fund (SWF) is a fund owned by a country (usually its central bank) composed of financial assets such as stocks, bonds, property or other financial instruments. SWFs differs from foreign exchange reserves by maximizing long term return and are not created or used for short term currency stabilization. They're based on current account surpluses and will become less important only if the countries with large surpluses begin to run prolonged current account deficits.
So what's the deal? Sovereign Wealth Funds are huge and I mean enormous. Their estimated $2.5 trillion in assets exceeds the sum invested by the world's hedge funds. Moreover, Morgan Stanley, in a widely cited study, projects that these investment funds could surpass global foreign reserves by 2011 when they each reach $6.5 trillion and be valued at a staggering $17.5 trillion in 10 years. It's said the Abu Dhabi Investment firm takes in $2 billion a day. Putting them in context.... The total value of all traded securities (all bonds and stocks) denominated in US dollars is $50 trillion. For the world, it's $165 trillion. The total value of traded securities in Africa, the Middle East, and emerging Europe combined is about $4 trillion; this is also roughly the size of these markets in all of Latin America.
In the past few months, the SWFs have injected about 29 billion dollars into US financial firms, such as a 10-billion-dollar investment in the UBS by the Singapore Investment Corporation, a 7.5-billion-dollar investment in Citigroup by the Abu Dhabi Authority, a stake of up to 5 billion dollars in Merrill Lynch by Singapore's Temasek and a stake of 5 billion dollars in Morgan Stanley by the newly-founded China Investment Corporation. Two Middle Eastern government funds now own 33% of the London Stock Exchange.
Issues arise...Many remember the issues with the ports deal. Probably the most political turbulence caused by a sovereign wealth fund occurred when Temasek Holdings, the state-owned investment branch of Singapore, purchased a stake in the company owned by the prime minister of Thailand, Thaksin Shinawatra. The deal fed anti-government demonstrations that led to his ouster in a military coup in 2006.
In further response to the perceived threat, a transatlantic defense is gradually mounting. In August 2007, the European Commission launched a probe into the role of SWFs in the European Union (EU). The investigation came after German chancellor Angela Merkel urged the EU to start screening foreign-controlled investments. These concerns have led the EU to consider whether to allow its members to use "golden shares" to block certain foreign acquisitions
A Senate Banking Committee heard lengthy testimony on them in December. The worry is that, beyond the possibility of foreign funds pushing up prices on bonds, stocks and real estate, they might exercise inappropriate control politically or in the private sphere. A government is a different type of animal in the investing world," he said. "We call them sovereign wealth funds, but once you're operating outside your own borders, you're not sovereign in the same sense." A U.S. government agency has begun an investigation of foreign state-run investment funds at the request of a Senate panel, as lawmakers examine whether the much-needed capital infusions being provided to major banks pose economic or security concerns.
Interesting piece on the topic...
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1868
Estimated size of some of the funds.
Spoiler :
