INTERNATIONAL CORPORATE FINANCE

Analysis and Discussion

of
SOVEREIGN WEALTH FUNDS
in the
World Financial Markets

In partial fulfillment of the course International Corporate

Finance under the guidance of Dr. P.C. Biswal, Associate
Professor, Finance, MDI Gurgaon

Submitted By:
Arpit Khandelwal 09P129
Ashish Rander 09P132
Divya Gosain 09P135
Puja D Shah 09P157
Rahul Balakrishnan 09P161

Date: 16th August 2010

1 Sovereign Wealth Funds; Section B

Outline of the Project

1. Introduction to Sovereign Wealth Funds 3

2. Types of Sovereign Wealth Funds 4

3. Major Factors that impact the size of Sovereign Wealth Funds 5

4. Comparing Sovereign Wealth Funds to other types of funds 6

5. Investments of Sovereign Wealth Funds 7

6. Concerns raised about Sovereign Wealth Funds 10

7. Economic Implications of Sovereign Wealth Funds 11

8. Impact of the recent Financial Crisis on the Sovereign Wealth Funds 14

9. Major Sovereign Wealth Funds of the world

o China SWF 16

o Singapore SWFs 18

o Middle Eastern SWFs 22

10. Analysis of Indian case for SWF and developing investment model 25

11. Countries which can develop SWF 28

12. References 29

13. Appendices 30

2 Sovereign Wealth Funds; Section B

Introduction to Sovereign Wealth Funds

The first Sovereign Wealth Fund was started in the year 1953 in Kuwait. Initially the Sovereign
Wealth Funds were started mainly by the Oil Exporting countries.

Sovereign Wealth Funds are state-owned investment funds. They invest

in financial assets such as stocks, bonds, property, precious metals or other financial instruments.
Sovereign wealth funds invest globally. They are used by countries to maximize their long term
returns on the foreign currency holdings. Instead of keeping the excess money in the central
bank or plugging it back into the system, a country may choose a Sovereign Wealth Fund to put
it into investments. Sovereign Wealth Funds are funded by foreign currency reserves but
managed separately from official currency reserves.

Since 2000 the number and size of Sovereign Wealth Funds has grown at phenomenal rate. IMF,
in 2008, had estimated them at about US$ 2-3 trillion and states that it expects the Sovereign
Wealth Funds to reach around US$ 10 trillion over the next decade. Currently around 20 nations
in the world hold a Sovereign Wealth Fund, with the top five funds holding about 70% of the
assets under management.

A comparison of global financial assets (in $ trillion) is given below that highlights the
importance of Sovereign Wealth Funds in today’s world (2008 figures).

$48.1

Retirement Funds AUM $23.6

Projected Sovereign Wealth … $7.5 - $10.0

Foreign Exchange Reserves $5.4

Sovereign Wealth Funds $3.0

Hedge Funds AUM $1.9

Private Equity AUM $1.3

3 Sovereign Wealth Funds; Section B

Types of Sovereign Wealth Funds

The following classifications are available for Sovereign Wealth Funds:

Commodities: These SWFs are either owned or taxed by the government and are created through
surplus forex earnings through commodity exports.
• Over $2.5 trillion in value in 2008

Non–Commodities: These SWFs are created by transferring assets from official exchange
reserves, i.e. assets accumulated as a result of current account surpluses.
• $1.4 trillion in value in 2008

Stabilization Funds: To insulate the economy against the commodity price swings

Savings Funds: To enable savings for future generation through a diverse portfolio of assets

Reserve Investment Corporations: Have higher risk, but established for higher return on
reserves

Development Funds: To fund the country’s domestic socio – economic projects

Contingent Pension Reserve: For financing health expenditures and social security, especially
in countries with an ageing population

4 Sovereign Wealth Funds; Section B

Major Factors that impact the size of Sovereign Wealth Funds

1) Price of Oil

a) Oil or commodity stabilization funds are largest subgroup of SWF

b) Fast accumulation of foreign reserves by the oil exporting countries - Due to booming oil
prices, cheap credit and momentum driven capital flows
c) Keen not to repeat the mistakes of the last oil boom in the 70’s, so they established
Sovereign Wealth Funds to preserve oil wealth for future generations and/or to smooth
consumption
d) Contingent spending policies of oil stabilization funds (accumulating wealth when oil
prices are rising and spending wealth to support the local economy when GDP is shrinking)
it becomes important to understand the magnitude and the relative importance of oil price
shocks relative to other sources of macroeconomic risk
e) Oil price innovations are the most important short and long-term economic drivers of local
GDP for GCC (Gulf Cooperation Council) countries. Investment guidelines- Stress on the
necessity to invest in assets with negative correlation to oil price movements to protect the
total wealth

2) Fiscal Situation of a country

a) If a country is facing fiscal difficulties and it faces large fiscal deficits, then it becomes
very difficult for such countries to maintain the size of the government owned Sovereign
Wealth Funds. The government usually needs money to help finance such deficits and
improve the economic condition and so they need to liquidate a portion of these funds

3) Economic Cycle

a) The financial crisis of 2008 had a negative impact on all the SWF’s in the world.
Depression causes lower global trade reducing the current account surplus of countries like
China, etc. This negatively impacts the size of Sovereign Wealth Funds

4) Current Account Balance

a) Established by countries which enjoy a current account surplus

5 Sovereign Wealth Funds; Section B

b) Have led to a build-up of foreign currency reserves in these countries
c) Since 1995, reserves have more than doubled but the currency reserves in developing
economies have increased sevenfold
d) Asian exporting countries’ combined current account surpluses grew from $53 billion in
2000 to $443 billion in 2007. The U.S. dollar accounted for slightly less than two-thirds of
total central bank foreign reserve holdings of all the countries as of the first quarter of 2008

5) Foreign Exchange Reserves of a Country

a) Major exporting nations or natural resource (like oil, etc) providers may accumulate large
amounts of FOREX reserves
b) Nations invest their foreign exchange reserves in assets such as the sovereign debt of
other countries, including securities issued by US Treasury
c) Some countries invest a portion of their excess foreign currency reserves in assets which
would earn higher returns, such as the equity shares
d) These especially include countries that are major exporters of commodities or natural
resources, such as oil, as well as those, like China, that are exporters of manufactured
goods.
e) In contrast US, the world’s largest importer of goods and natural resources, has run
increasingly large current account deficits since the early 1990s

Sovereign Wealth Funds vis-à-vis other type of funds

The key aspect in which Sovereign Wealth Funds differ from other type of funds (Hedge funds,
Pension funds) is the objective of the investment:

1. Accumulate sufficient assets, through contributions and investment income

2. Satisfy all pension obligations of the contributors on a timely basis
3. Primary aim of most hedge funds is to reduce volatility and risk
4. Preserve capital and deliver positive returns under all market conditions
Unlike the aforementioned objectives of different funds, the aims of SWFs are as follows –

6 Sovereign Wealth Funds; Section B

Comparison of investment vehicles

1. SWFs exceed the size of hedge funds (around US$1.7 trillion), but comparison is
somewhat misleading because of leverage

2. SWF Portfolios are more diversified than traditional reserves holdings

3. Greater Stakes in Equities and Wider Geographical Dispersion than other forms of
investment funds

4. Market Participants expect SWFs Portfolios to look like those of the larger Public Sector
Pension Funds

5. Some SWFs are also exploring Alternative Investments, including Hedge Funds,
Private Equity, and Real Estate

The following are the risks involved in SWFs which could culminate into a National Security
Risk

Investments of Sovereign Wealth Funds

The Investment Behavior of Sovereign Wealth Fund is determined by the investment objectives.
The objectives determine the Investment Horizon and the Risk/Return Trade-offs.

Singapore SWFs are the most active internationally - oriented funds and the Chinese fund has
focused on the home market front.

7 Sovereign Wealth Funds; Section B

Source: SOVEREIGN WEALTH FUND INVESTMENT PATTERNS AND PERFORMANCE (Apr 2009) by
Bernardo Bortolotti, Veljko Fotak, William Megginson and William Miracky

Industrial and Industrial Distribution of SWF Investments:

8 Sovereign Wealth Funds; Section B

Source: SOVEREIGN WEALTH FUND INVESTMENT PATTERNS AND PERFORMANCE (Apr 2009) by
Bernardo Bortolotti, Veljko Fotak, William Megginson and William Miracky

Norway’s Government Pension Fund-Global is the world’s second largest SWF. The fund sub-
contracts out all of its investments to asset managers, and so the fund is never listed.

SWFs favor investing in the financial industry. The 376 financial firm investments account for
30.9% of all deals, by number, and over half (54.6%) of the value of all acquisitions.

Singapore receives the largest number of SWF investments—mostly from Singaporean SWFs—
total value of investments ($13.23 billion) yields sixth place ranking.

United States is the most popular target for SWFs with 10.9% of the number and 22.2% of the
total value of SWF investments being channeled to US headquartered companies. China is the
second most popular target nation, though almost all of the 79 deals worth $31.0 billion are
domestic investments by the China Investment Corporation

Apart from investing in a few home-country firms, it seems clear that SWFs prefer to purchase
stock and real estate in the capital markets of the principal English common law countries:
America, Britain, and Australia.

Temporal Distribution OF Sovereign Wealth Fund Investments, January 2000-Dec 2008

Source: SOVEREIGN WEALTH FUND INVESTMENT PATTERNS AND PERFORMANCE (Apr 2009) by
Bernardo Bortolotti, Veljko Fotak, William Megginson and William Miracky

9 Sovereign Wealth Funds; Section B

The graph shows the massive spike in SWF investment in 2007 (and 2008) versus previous years,
as well as the rising share of financial deals in aggregate investment value

Concerns raised about Sovereign Wealth Funds

Transparency/ Poor Accountability

1. Distinct policy concerns about the effects of SWF investment

2. May pursue political objectives or policies that are not strictly financial
3. Few publish information about their assets, liabilities, or investment strategies
4. Rogue traders have taken large speculative positions and lost heavily. Traders acted without
the approval of the appropriate credit risk managers.
5. Largest share of assets is with the countries in which the state has played a dominant role in
the society and the economy; and where representative institutions are relatively less
established

Global Macroeconomic Stability

1. Macroeconomic imbalances - Over-consumption by the United States, and mercantilist

policies of North-East Asian countries, particularly China.
2. Continued acquisition of excess reserves and policies to maintain under-valued currencies,
perpetuate imbalances and adversely impact on financial stability
3. Mitigated by provision of liquidity that the SWFs can potentially provide

Conflicts of Interest, Potential Insider Trading and Regulatory Effectiveness

1. When governments which are regulators become investors

2. SWFs as government agencies could have access to commercial and security sensitive
information. Could also lead to insider-trading
3. Prosecuting officials of foreign governments - Diplomatic dilemma

Potential to Disrupt Financial Markets

• Cause volatility in markets

• Use status as government instruments to compete unfairly

10 Sovereign Wealth Funds; Section B

Protectionism

• Protectionist reaction by the investee country government

• Countries pick and choose who can invest in what

Exercising Influence as a Shareholder

• Shareholders with even seemingly small ownership percentages could exercise influence
disproportionate to their shareholding
• Use their influence in a company to:
• extract technology
• protecting their national industries from competition

Disguised Political Objectives

• If the governments will use the SWFs simply as financial tools or to implement political
power
• Political objectives might influence their management
• Use funds to create artificial monopolies
• Transfer of strategic assets
• Key industries and technologies
• Trade & state secrets
• Natural resources

Economic Implications of Sovereign Wealth Funds

— Increase in demand for capital market products

1. SWFs enjoy considerable freedom in their investment decisions and are expected to
maximize performance, hence a substantial inflow of funds from SWFs in emerging
economies expected
2. In their asset management, SWFs behave similar to investment, pension, hedge or private
equity funds; therefore, they are seeking to diversify across a wide range of asset classes
in different countries.

11 Sovereign Wealth Funds; Section B

 3. This suggests that SWF growth will likely lead to an increase in demand for stocks,
private and public bonds, as well as real estate, but also private equity, possibly also
funds or hedge funds, as well as the use of derivative instruments.

— Substitution effects on asset classes

1. The investment of official central bank reserves in liquid assets will be replaced by
investments in assets with higher expected returns, i.e. stocks or private bonds
2. This may have a perceivable impact on market demand and yields

— Demand for asset management and investment services

1. SWFs have the choice of outsourcing all or a part of their funds to outside fund
managers; can purchase parts of the asset-management value chain from independent
suppliers
2. Market analysis and investment evaluation, portfolio construction and monitoring,
securities trading, clearing and settlement, hedging and risk mitigation are services which
will pick up
3. Complex investment banking services like advisory, valuation and due diligence, legal
and accounting advice, placement and distribution, and settlement services will incresae

— Impact on exchange rates and asset prices

1. Impact asset prices and exchange rates through price pressures or a change in risk
aversion
2. A direct impact on asset prices or exchange rates through price pressures triggered by
SWF demand (e.g. equities) or supply (e.g. government bonds)
3. Impact on asset prices through a rise in global risk aversion, given their return-orientation
and longer-term investment horizon.

— Potential risks to international financial stability

1. Triggering “herding” behavior
Large sums of capital are concentrated in the hands of a limited number of large actors. In the
absence of SWFs, these surpluses would be distributed among domestic citizens

12 Sovereign Wealth Funds; Section B

 The presence of a large player with a high-risk appetite can induce market behaviour that
could lead to a negative outcome.

2. Lack of transparency and short-term volatility

Inducing other traders to mimic strategies, leading to greater buying or selling on one side of
the market
Since SWFs have become more widely known, many analysts have tried to anticipate their
strategies, based on the investment strategies of similar institutional investors. The lack of
transparency about the holdings of SWFs introduces an element of uncertainty into markets

3. Non-economic objectives and financial protectionism

A protectionist backlash against SWFs would restrict cross-border investment and slow
economic growth. The reaction of Western states to SWF investment may lead to the
adoption of barriers, preventing the free movement of capital

4. Investor activism and monitoring of managers

Many SWFs have done their utmost to prove that they will be passive investors, including
forgoing any voting rights. While this may ward off protectionist sentiment, it may also
impede the monitoring of managers. When a company experiences large capital losses, more
active investors usually push for some sort of reform to avoid losses in the future

13 Sovereign Wealth Funds; Section B

Impact of the recent Financial Crisis on the Sovereign Wealth Funds

• Not all SFWs suffered equally,

• Libya's SWF ($50.6 billion) returned profits of about $2.4 billion since 2006, (78% of the
portfolio invested in short-term financial instruments and only $8 billion in equities,
spread mostly across North Africa and Asia.)

14 Sovereign Wealth Funds; Section B

 • The Saudi Arabian Monetary Agency (SAMA), did not lose much due to its conservative
dollar-and-bond-heavy portfolio.
• Lessons learned : Spurred SWFs to rebalance their portfolios within individual asset
classes,
o Moving developed market investments away from equities and towards bonds.
o Allows SWFs to increase their holdings of more liquid bonds, without sacrificing
their other developed and emerging market investments; perhaps showing that
SWFs believe the prospects for growth among higher-risk and higher return
equities are highest outside the US.

Despite global crisis, SWFs have continued to follow two core investment mantras
(1) Capitalising upon short-term market lows for long-term gain
(2) Investing in industries that help build the comparative advantage of the home country

• These mantras may not be the best strategy. : Sovereigns are more likely to call upon
SWFs for domestic stabilisation purposes.
• SWFs will need to hold a large share of counter-cyclical assets to avoid realising large
losses.
• Real estate, commodities and direct investments in firms that enhance a sovereign’s
comparative advantage tend to move pro-cyclically with the SWF’s domestic economy.
• Hence SWFs face a pull between market opportunities, and core investment
competencies.
• Lastly, sovereign governments have re-evaluated the management and oversight of
SWFs.
• Slowdown may only be transitory. - High commodity prices return and large global
imbalances will increase the volume of their inflows.

Strong inflows into SWF is very likely:

(1) Unwillingness of Chinese policymakers to alter their currency peg
(2) Continued rise in commodity demand
(3) Nascent stage of renewable energy technologies

15 Sovereign Wealth Funds; Section B

China Sovereign Wealth Fund

1. China Investment Corporation (CIC)

2. One of the largest SWFs after UAE and Singapore
3. Established in 2007 with $200 billion AUM. It has grown to a value of $332 at year end
2009
4. $2.5 trillion in currency reserves in China
5. Want to utilize these reserves for the benefit of the state, modelled according to
Singapore's Temasek Holdings
6. Initial investment:
a. Invest in ~50 large enterprises around the world
b. Special treasury bonds issued to raise $207.9 billion – to create capital
7. Governance:
a. 11 member board of directors
b. Reports to the State Council of the country
c. Considerable influence of China’s MoF
8. Investment Strategies:
a. Need for high return rates given the access to the country foreign exchange
reserves
b. Focus on a portfolio of financial products
c. Considering investments in Hong Kong and Taiwan
d. Considering opening overseas branches
e. Has invested money in struggling financial firms during the time of US financial
crisis. E.g. Morgan Stanley
f. Looking to invest in sectors like natural resources, telecommunication and real
estate
9. Concerns:
a. Gives China a theoretical ability to purchase controlling interests in major
corporations, raising potential national security concerns
b. Countries with huge trade deficits at more risk
c. Concerns about the sovereign wealth fund’s clear investment strategy free form
the political influences of the country

16 Sovereign Wealth Funds; Section B

Major Investments:

10. Implications for China’s economy:

a. New vehicle for managing forex reserves; soak up excess liquidity
b. Prevent domestic inflation or speculative bubble in China due to excess money
supply
c. Reduced pressure to appreciate currency (allegedly undervalued)
d. Accumulation of US debt with excess money not very profitable; gives the
government to earn a positive rate of return on investments
11. Implications for Global Financial Markets and the US Economy:
a. Types of investments made is a critical issue
b. Shift in portfolio from US treasury to other assets could lead to upward pressures
on the interest rate (currently Fed trying to bring them down)
c. Purchase of strategic assets for geopolitical purposes will raise security concerns

17 Sovereign Wealth Funds; Section B

 Singapore Sovereign Wealth Fund

Temasek Holdings

1. Incorporated in 1974 and supported by 12 affiliates. It has a portfolio of S$186 Bn as on

31 March 2010 which focuses on emerging economies
2. Initial portfolio had 35 investments and the value of the portfolio was S$ 354 million;
investments included shipping companies among others. Gradually, Singtel and
SingPower were transferred to the company.
3. Funded through the dividends from the portfolio, divestment earning and leveraging.
Close to 75% of the exposure is to the emerging markets of Asia with sector focus being
on financial services; telecommunications, media & technology; and transportation &
industrials.
4. Temasek Claimed in 2008 that it couldn’t be classified as an SWF as it sells assets for
new investments and this does not require approval from the government

18 Sovereign Wealth Funds; Section B

Investment Strategies of Temasek

Portfolio Investments by Geography

Majority of the holdings are in the emerging economies of Asia, a large part is in Singapore itself.

Portfolio Investments by Sector

It has a diversified portfolio with investments in varied fields.

19 Sovereign Wealth Funds; Section B

Performance of Temasek Holdings

Tamasek Holdings has given a consistent return of 17% compounded annual return over its life
and 42% is their one- year total shareholder return. Tamasek Holdings has a strong foundation
base of Singapore Blue Chip companies. In the latest fiscal year the Wealth Added was S$42
Billion.

Controversies

1. Tamasek’s close association with the Singapore Ministry of Finance has been a bone of
contention
2. When ST Telmedia (Tamasek company) acquired a stake in Indostat there were labour
strikes & protests
3. When ST Telemedia tried to acquire a stake in Global Crossing the deal had to be
approved by the US government as it was wary of foreign control.
4. A major controversy took place when Tamasek acquired Shin Corporation (Thai prime
minister owned company). This led to massive protests and a political crisis in the
country. Lately Tamasek had to divest a large part of its holdings.

20 Sovereign Wealth Funds; Section B

Government of Singapore Investment Corporation

It is a global investment management company founded in 1981. Its main aim is to manage
Singapore's foreign reserves. It invests in equities, fixed income, natural resource, treasury &
currencies, real estate, private equity and infrastructure.

GIC Investment Process

The aim is to construct a

diversified multi-asset class
portfolio by increasing
alternative investments
such as private equity and
real estate.

In 2009-10 the Portfolio

underwent a loss of more
than 20%.

21 Sovereign Wealth Funds; Section B

Controversies

GIC had invested in UBS and Citigroup to a large extent. During the financial crises GIC
converted its preferred stock holding to common stock at a price of USD 3.25/ share to reduce
their loss.

Middle East Sovereign Wealth Fund

Structure of Sovereign Wealth Funds (mid 2008)

Stru

Oil and commoditi

Other
1) Kuwait Investment Authority

Country Established US $ Billion Origin Investment Entity

in Style Structure
Kuwait 1953 202.8 Oil Mostly Fund
Portfolio

Own funds
The Kuwait Investment Authority (KIA) is the parent organization of the Kuwait Investment
Office, which was initially established as the Kuwait Investment Board. The KIA invests in the
Local, Arab and International Markets.

22
Borrowed funds
Sovereign Wealth Funds; Section B
Investment Strategy & Objectives
The Kuwait Investment Authority is a long term investor. Objectives include –
• Maintaining the real value of the funds entrusted to the Office for the Future Generation
Fund,
• Achieving a fair return over the long-term
• Increase the favorable reputation as an expert and progressive institution in the
international financial markets.
Transparency Rating: 6

2) Iran Oil Stabilization Fund

Country Established US $ Billion Origin Investment Entity

in Style Structure
Iran 1999 23 Oil Hedging Corporation

This fund was created to invest Iran’s oil revenues and act as a stabilizer against fluctuating oil
revenues.
The investment arm is the Iran Foreign Investment Company (IFIC). It was incorporated in
March 1998 as a Private Joint Stock company with a mission to manage and expand Iranian
holdings abroad.
IFIC has interests in energy, telecom and IT, banking, insurance, stock markets, industry, mining,
oil, gas and petrochemicals, as well as new and future technologies.
Transparency Rating: 1

3) Bahrain Mumtalakat Holdings

Country Established US $ Billion Origin Investment Entity

in Style Structure
Bahrain 2006 9.1 Oil Portfolio Corporate

The primary funding source of wealth comes from oil. Currently, their investment portfolio is
heavily weighted into the local Bahrain economy in a number of industries ranging from real
estate to telecommunications.

23 Sovereign Wealth Funds; Section B

The fund is primarily made up of state owned enterprises such as Gulf Air, Bahrain Real Estate
Company (Edamah), and the General Poultry Company. They are in the process of diversifying
their investment portfolio.

4) Abu Dhabi Investment Authority

Country Established US $ Billion Origin Investment Entity

in Style Structure
UAE 1976 627 Oil Mixed Fund

Established in 1976, the Abu Dhabi Investment Authority’s (ADIA) main funding source is from
a financial surplus from oil exports.

Investment Strategy and Objectives

The Abu Dhabi Investment Authority invests in a variety of asset classes. Benchmarks can range
from the MSCI Index to the S&P 500 Index.
Some of their asset allocation consists of:
 Equities – Developed Markets
 Equities – Emerging Markets
 Hedge Funds
 Futures
 Sovereign Debt
 Corporate Debt
 Real Estate (Funds or Direct Investments)
 Private Equity
 Infrastructure

24 Sovereign Wealth Funds; Section B

Analysis of Indian case for SWF

Major reasons for building Sovereign Wealth Funds:

Excess Foreign Reserves:

• India needs to park their excess reserves as there is a cost involved in maintaining such
reserves/ liquidity which is the loss of possible returns.

Better Management of foreign Reserves:

• The foreign reserves could be invested for long term in slightly risky and illiquid assets
which can provide better returns.

• The Sovereign Wealth Funds of Singapore has managed to gives returns in excess of 15%
for many years.

Acquiring Strategic Assets:

• SWF help the domestic companies to arrange the necessary funds to acquire these assets.

• The China Investment Corporation (CIC) is mainly investing in the Power Sector trying
to acquire strategic assets abroad.

Major arguments against creating a Sovereign Wealth Fund:

India’s reserves are built from capital account inflows and are hence assets that are subject
to capital flight:
• India has huge merchandise trade deficit and current account deficit whereas reserves of
other countries have been built up from huge current account surpluses.
• India’s reserves are driven by capital account surpluses rather than the current account.
Hence they is need to maintain reserves in liquid and lower-yielding assets
• Sovereign Wealth Funds usually make illiquid, long term investments.

Political Independence in Management and formation:

• Control of the RBI or the Ministry of Finance.

• Fund will be managed too cautiously affecting the returns of the fund. If the investments
are not made for a long term horizon in some slightly risky assets then the entire purpose
of creating such a fund will be defeated.
• Concerns about accountability and fiscal indiscipline

25 Sovereign Wealth Funds; Section B

 Difficulty in acquiring Strategic assets:
• Direct investment in strategic assets by a Sovereign Wealth Fund will invite severe
criticism for its alleged non-commercial and political objectives.
• Santiago Principles

Possibility of huge losses:

• No guarantee that the investments made by the Indian Sovereign Wealth Fund will be
profitable
• During the global financial crisis, Sovereign Wealth Fund from West Asia, Singapore,
China and Norway suffered huge losses in their investments in Western banks and private
equity funds.

Global SWFs

Middle East
China Singapore Singapore
Gulf Cooperation
CIC Temasek GIC
Council
AUM $ 200 Bn More than $ 2000 Bn $ 186 Bn $ 124 Bn
Source of Oil and commodity Current Account Current Account
Current Account Surplus
Country’s SWF based SWF Surplus Surplus
Funded through
Low proportion of Funded through
Additional Special bonds issued dividends,
funds borrowed from dividends, divestment
Capital worth $ 207 Bn divestment
outside earnings
earnings of PSU
Different investing Focus on
2/3 Capital in US strategy - LT to Asia focused fund ; in diversifying and
Treasury Bills speculative and the sectors of investing in
Investment hedging purposes
Focus on real Estate, financial services, alternative
Strategy
natural resources and Asset Allocation telecom , media and investments like
telecommunications consists of equities, transport real estate and
futures, sovereign debt private equity

Is India setting up a Sovereign Wealth Fund?

In a recent report by SEBI in 2009, the SEBI has recommended the government not to set up a
Sovereign Wealth Fund.

26 Sovereign Wealth Funds; Section B

According to the Indian express July 20, 2010, a proposal for setting up a sovereign wealth fund
(SWF) is expected to be put before a group of ministers. It was reported in the newspaper that the
Sovereign Wealth Fund will be created with an investment of $10 billion.

An Indian Sovereign Wealth Fund would be a pool of money, controlled by government, which
will be used to purchase overseas assets. This idea is weighed down with difficulties in the
context of poor governance in India. The main reason quoted for setting up this fund was to help
Indian companies acquire overseas assets.

Size and Investment Strategy of the Indian Sovereign Wealth Fund

Invest Through
• Close to 10- PSU • Invest in
15%of • Strategic Assets equities , Asian
Reserves • EgOVL companies
should be used
Part of the
Diversification
Reserves

Size of Investment:

• India should use only 15% of reserves for investment. This is because India has current
account deficit and does not want to take the risk of a heavy loss.

Mode of Investing:

• Indirect: Acquiring strategic assets is a bone of contention among many a nation, PSUs
can be use in this purpose. Like Temasek, can run them professionally and divest them

Investments:

• The eastern European and African countries are mineral rich. China has already acquired
natural resource asset in most of Africa. India through its PSU ‘s like OVL needs to use
the funds of SWF to acquire natural resources like oil fields, coal fields

27 Sovereign Wealth Funds; Section B

 • India should not invest so heavily in alternative investments. This is because Private
equity companies are not transparent; hence there is no knowledge of what India is
investing in

• India should invest in long term projects, similar to CIC like European power plants and
renewable energy plants.

• In case India wishes to invest in corporations, India should follow Tamasek and focus on
the Asian corporates as their growth prospect is very strong

• India should diversify as much as possible to increase return

• India should try to establish an independent management and accounting system

Countries that can develop SWFs

We have tried to analyze which other countries can develop a Sovereign Wealth Fund. The
following procedure has been followed for the analysis:

1. We started with a list of countries without SWFs and proceeded towards collecting their
reserves, imports, short term debt and long term debt figures

2. 12 month imports and short term debt figures were directly subtracted and those countries
falling short and ignored for further analysis

3. Long term debt is amortized for 10 years and interest is calculated using 1y LIBOR and
those countries found unable to service these liabilities are further removed from the
study (assuming 50% of LT debt is being serviced through reserves)

4. After deduction, 15% of remaining amount is taken as the corpus for a potential SWF

Limitations of the study

1. Country Macro-economic parameters are not taken into account. These may restrict
forming SWF or may facilitate it

2. We have not taken fiscal deficit and the source of reserves into account in the analysis

3. Volatility of reserves is also not taken into account. This may affect the sustainability of
the SWF

28 Sovereign Wealth Funds; Section B

An excel analysis of the same is attached along with as a part of the Appendix A

29 Sovereign Wealth Funds; Section B

References

1. Marrewijk, Charles Van (2007), “International Economics” (I Edition) published

by Oxford University Press, New Delhi.
2. F Salvator, Wominick (2001), “International Economics” (VII Edition) published
by John Wiley & Sons, New Delhi.
3. Dr. Y. V. Reddy (2007), “Forex reserves, Stabilization Funds and Sovereign
Wealth Funds: Indian Perspective”, at the Golden Jubilee Celebrations of the
Foreign Exchange Dealers, Association of India, Mumbai
4. Heller, H. Robert (1966), “Optimal International Reserves”, Economic
Journal,Vol. 76 (June), pp. 296-311
5. Tamasek Annual Report
6. GIC Annual Report
7. Heller, H. Robert (1966), “Optimal International Reserves”, Economic
Journal,Vol. 76 (June), pp. 296-311

8. Behrendt, S., 2009. Gulf Arab SWFs—managing wealth in turbulent times, The
Carnegie Endowment for International Peace, Washington, DC.
9. Chen, G., 2009. ‘Chinese sovereign fund turning to natural resources’, The New
York Times, 9 November.
10. Chong, F., 2009. ‘Korean fund in $685m deal’, The Australian,
11. Houget, G., Nugee, J. and Rozanov, A., 2009. ‘Sovereign wealth funds: emerging
from the financial crisis’, State Street Global Advisors, Boston,August.
12. International Working Group of Sovereign Wealth Funds, 2008, Sovereign wealth
funds: generally accepted principles and practices, ‘Santiago Principles’,
Santiago, October

30 Sovereign Wealth Funds; Section B

Appendix A – Potential SWF Reserves

Quarterl
Annual Remaining
Country Reserv y Long
short Reserves - Reserves
without es Term Interest
term Short for SWF
SWF ($ Bn) external
debt Term debt
debt
Argentina 49,000 89,200 110.048 48,830 9,210 6,634
Bulgaria 15,123 36,698 74.312 15,013 3,789 1,968
Colombia 25,557 49,636 16.44 25,502 5,125 3,441
Croatia 12,629 58,253 25.788 12,577 6,015 1,436
Czech
37,219 62,372
Republic 96.708 37,017 6,440 5,070
3,49,24 1031.52
Denmark 72,658
4 8 71,506 36,059 8,021
Egypt 35,223 30,726 10.244 35,156 3,172 5,036
1,98,79
Hungary 43,167
7 117.14 42,942 20,526 4,902
Israel 63,409 55,871 144.952 63,202 5,769 9,048
10,50,2 7,22,46 5455.74
Japan
35 4 8 10,44,228 74,594 1,51,040
Jordan 11,859 5,759 34.072 11,809 595 1,727
Morocco 20,006 23,045 8.84 19,963 2,379 2,816
Peru 39,093 30,743 19.54 39,044 3,174 5,619
2,26,10
Poland 86,493
9 216.62 86,129 23,346 11,168
1,00,45
Romania 43,656
6 66.632 43,497 10,372 5,747
South Africa 38,283 57,646 85.54 38,110 5,952 5,270
2,55,52 4,32,53 3116.69
Switzerland
2 0 2 2,52,249 44,659 34,488
1,49,20
Thailand 45,594
0 95.696 1,48,970 4,708 21,992
2,18,61
Turkey 76,823
7 198.308 76,484 22,572 9,780
Uruguay 7,747 12,374 1.584 7,738 1,278 1,065
6,03,75
Austria 19,133
6 908 18,081 62,338
4,57,60 3179.67
Belgium 25,138
2 6 21,607 47,247
2,50,47
Finland 9,950
0 610.544 9,246 25,861
1,97,10 34,84,3 6607.50
Germany
7 34 4 1,89,568 3,59,757
3,95,50
Greece 4,915
1 772.644 4,060 40,835
1,44,28 18,96,2 2619.43
Italy
7 92 6 1,41,258 1,95,792
Netherlands 37,753 14,94,7 3907.84 33,399 1,54,331

31 Sovereign Wealth Funds; Section B

 36
3,49,84
Portugal 18,199
8 793.144 17,318 36,122
Slovakia 1,899 35,587 121.068 1,698 3,674
Slovenia 998 44,050 55.888 904 4,548
17,99,4 2983.54
Spain 29,560
91 8 26,286 1,85,797
5,89,47 1168.11
Sweden 46,626
6 6 45,339 60,863
Ukraine 30,876 84,262 76.244 30,717 8,700
United 27,31,3 26516.8
96,968
Kingdom 52 64 69,971 2,82,012
Luxembour 8,67,5 4591.6
765
g 89 96 -3,855

32 Sovereign Wealth Funds; Section B

Appendix B – Important SWFs Worldwide

33 Sovereign Wealth Funds; Section B