Not all sovereign wealth funds are born equal: Let’s look at the oil rich gulf countries
Sovereign Wealth Funds (SWF) have become diversified investment vehicles that invest across equity and fixed income products, but also are active players in private equity and in early-stage tech companies. As we look at the global landscape for SWFs, it is not surprising that of the largest 10 SWF, with a combined $7.6 trillion in assets, 70 percent of these are from oil and gas producers.
What are sovereign wealth funds?
A sovereign wealth fund is a state-owned investment fund investing money generated by the government, often derived from a country’s surplus reserves and natural resource industries. SWFs aim to build wealth for a country’s economy and its citizens.
Popular sources of SWF are surplus from state-owned oil and gas, and trade surpluses. SWF are used to preserve capital and generate financial returns that can be used to increase prosperity of a country and its citizens. Oil and gas producers are known for using their SWF to diversify their investments away from energy and to boost the country’s competitiveness. This is a well-known strategy in the Gulf Cooperation Council (GCC). Wealthy nations traditionally use sovereign wealth funds to invest surplus billions overseas to prevent inflation at home, diversify income streams and accumulate savings. Norway and Chile are two good examples using their SWFs to save oil and copper revenues respectively in the form of sovereign wealth funds. These actions have prevented these two resource rich countries from experiencing Dutch Disease, also known as the ‘resource curse’ which could have led to high inflation at home and affected competitiveness across other less strategic sectors.
The Gulf Cooperation Council SWF are different
While Kuwait’s sovereign wealth fund was the first global SWF to be established in 1953, most GCC SWF were created following the oil and gas booms of the 70s, and they very much followed the Norway traditional model of structure and investment strategy. They are all controlled…