{"id":633773,"date":"2017-10-13T00:00:00","date_gmt":"2017-10-12T22:00:00","guid":{"rendered":"https:\/\/www.ie.edu\/insights\/latest-news\/articles\/sovereign-wealth-funds-from-traditional-banking-to-artificial-intelligence\/"},"modified":"2022-02-18T12:53:40","modified_gmt":"2022-02-18T11:53:40","slug":"sovereign-wealth-funds-from-traditional-banking-to-artificial-intelligence","status":"publish","type":"articles","link":"https:\/\/www.ie.edu\/insights\/articles\/sovereign-wealth-funds-from-traditional-banking-to-artificial-intelligence\/","title":{"rendered":"Sovereign Wealth Funds: From Traditional Banking to Artificial Intelligence"},"featured_media":636385,"template":"","meta":{"_has_post_settings":[]},"schools":[],"areas":[18,442],"subjects":[],"class_list":["post-633773","articles","type-articles","status-publish","has-post-thumbnail","hentry","areas-finance-control","areas-sovereign-wealth"],"custom-fields":{"wpcf-article-leadin":["Sovereign wealth funds are government-owned funds that follow long-term investment policies and\u2014unlike pension funds, for example\u2014have no obligations to third parties. This lack of obligations has a clear impact on the funds\u2019 investment policies and allows them to reach very large volumes. The assets managed by sovereign wealth funds are equivalent in value to the combined GDP of Russia and Germany."],"wpcf-article-body":["Sovereign wealth funds (SWFs) are representative of the sort of institutional investors that sustain capitalism as we know it today. SWFs currently manage a total of $7.4\u00a0trillion in assets, a sum equivalent to the combined GDP of Russia and Germany. The influence of SWFs on the global<\/a> stock markets is undeniable: these funds hold an estimated 9% of the world\u2019s listed shares. However, despite their size and influence, this peculiar group of investors remains poorly understood.\r\n\r\nThe definition of SWFs as a group is several years in the making. The question of which entities can be classified as this type of investment vehicle is still being debated. The label sovereign wealth fund<\/em> did not even exist until 2005. Coined by the economist Andrew Rozanov, the term refers to a heterogeneous group of investment funds that are still quite young (70% of the nearly one hundred SWFs currently in existence were established after the year 2000).\r\n\r\nIn recognition of the mutable nature of SWFs, one of the definitions we propose for this group is relatively broad: government-owned investment funds that pursue a long-term investment strategy<\/a> and have no obligation to pay pensions. The distinction between SWFs and pension funds is a key element of the definition. SWFs, by definition, are free from the characteristic liability of public pension funds: obligations to pensioners. SWF investment policies are clearly influenced by this lack of obligations to third parties. Unlike pension funds, SWFs are not responsible for any regular payments and thus have no periodic liquidity needs. In addition, the focus on long-term investment distinguishes SWFs from private equity, which has defined investment horizons, and from hedge funds, which are often opportunistic.\r\n\r\nThe definition includes another fundamental characteristic: SWFs are state-owned. Some SWFs\u2014such as the Alaskan fund in the United States and the funds of Dubai and Abu Dhabi in the United Arab Emirates\u2014are owned by subnational governments. In any case, SWFs are public financial<\/a> vehicles, a fact that has direct implications for the funds\u2019 investment strategies<\/a> and for the reaction of recipient countries. SWFs have been a subject of controversy in various cross-border transactions over the past decade. One key characteristic of SWFs is government involvement in state capitalism. SWFs make decisions on the basis of financial and economic criteria, but they are not free from state influence, which is proportional to the extent of government control<\/a> over the funds\u2019 decision-making bodies. In short, SWFs are major players in the state capitalism that dominates large economies such as China, Russia, Singapore, Saudi Arabia, and South Korea.\r\n
The assets managed by SWFs are equivalent in value to the combined GDP of Russia and Germany.<\/blockquote>\r\nIn fact, a key characteristic of SWFs is the fact that they were pioneered by developing countries\u2014as defined by the United Nations\u2014rather than developed economies. Of the rich countries that make up the Organization for Economic Co-operation and Development (OECD), only Australia and Norway have SWFs among the top 20 largest funds in terms of the value of assets under management. Norway, of course, is the exception that confirms the rule, not only because it is a rich European country but also because it owns the world\u2019s largest SWF\u2014valued at nearly $1\u00a0trillion\u2014and is a model of governance, transparency, responsible investment, and shareholder activity. In short, Norway is a key player in the industry, but the industry is dominated by developing countries.\r\n\r\nThe list of the world\u2019s largest SWFs is dominated by China, Saudi Arabia, Kuwait, Singapore, and the United Arab Emirates. In fact, 82% of the assets owned by this peculiar class of funds are in the hands of developing or transitional economies. After Norway\u2019s fund, the largest SWF is the China Investment Corporation (CIC). Created just ten years ago, CIC has invested in multiple sectors and manages assets valued at $814\u00a0billion. The investment history of this mammoth fund reflects an industry-wide trend that illustrates how SWFs have evolved.\r\n\r\nIn December 2007, CIC acquired a 10% stake in Morgan Stanley for $5 billion. The investment was a financial<\/a> disaster and was roundly criticized by various factions of the Chinese political establishment, which did not understand why China should bail out a strategic<\/a> sector of its main economic rival. In a matter of months, SWFs invested a total of $56 billion in the Western financial system: Barclays, Citigroup, Credit Suisse, and UBS all received multimillion-dollar investments from SWFs in Singapore, China, Kuwait, Qatar, and the United Arab Emirates.\r\n\r\nIn the intervening decade, SWFs have embraced a wider range of sectors, investing vast sums in infrastructure, real estate, and even venture capital. Today, unlisted assets comprise 30% of the wealth controlled by SWFs, up from 12% in 2007. Over the same ten-year period, fixed-income securities have dwindled as a share of the assets held by SWFs, dropping from nearly 41% to 28%.\r\n
The influence of SWFs on the global stock markets is undeniable: these funds hold an estimated 9% of the world\u2019s listed shares.<\/blockquote>\r\nWith volatile stock markets and vivid memories of the crisis triggered by the Lehman Brothers collapse, SWFs have turned to off-market investments: energy assets; key infrastructure such as ports (Melbourne), airports (Heathrow), and water-management utilities (Thames Water); buildings (Canary Wharf and the iconic Plaza Hotel); and even venture capital (the Saudi SWF is the main investor in the largest venture capital fund ever created, which has invested $93\u00a0billion in high-tech<\/a> sectors such as artificial intelligence and robotics).\r\n\r\nIn summary, after making a name for themselves by acquiring stakes in major publicly traded financial<\/a> groups, SWFs have reoriented their investment strategies<\/a>. They now dominate sectors that require much greater sophistication, including technology<\/a>, real estate (hotels, logistics, commercial property, etc.), infrastructure (usually in consortia with large private funds and public pension funds), and start-ups (the Singaporean funds Temasek and GIC are among the biggest players in venture capital).\r\n\r\nSWFs are undeniably influential and appear likely to remain so in the coming years, despite falling oil prices. Their participation as responsible long-term investors will have an impact on a varied and substantial range of 21st<\/sup>-century financial<\/a> issues, including venture capital, private equity, the \u201cgreen economy,\u201d the attainment of the Sustainable Development Goals, and efforts to improve corporate governance.\r\n\r\n \r\n\r\n\u00a9 IE Insights.\r\n\r\n "],"wpcf-article-extract-enable":["1"],"wpcf-article-extract":["By Javier Capap\u00e9<\/strong>. Sovereign wealth funds are government-owned funds that follow long-term investment policies and..."],"wpcf-article-summary-enable":["1"],"wpcf-article-summary":["Sovereign wealth funds are government-owned funds that apply long-term investment strategies and have no obligations to third parties. SWFs currently manage a total of $7.4\u00a0trillion in assets and hold an estimated 9% of the world\u2019s listed shares. The SWF industry is dominated by countries like China, Saudi Arabia, and the United Arab Emirates. In recent years, SWFs have turned to off-market investments in areas such as technology and infrastructure. Participating as responsible long-term investors, these funds will have an impact on issues such as venture capital, the \u201cgreen economy,\u201d and the attainment of the Sustainable Development Goals."]},"_links":{"self":[{"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/articles\/633773","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/articles"}],"about":[{"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/types\/articles"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/media\/636385"}],"wp:attachment":[{"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/media?parent=633773"}],"wp:term":[{"taxonomy":"schools","embeddable":true,"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/schools?post=633773"},{"taxonomy":"areas","embeddable":true,"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/areas?post=633773"},{"taxonomy":"subjects","embeddable":true,"href":"https:\/\/www.ie.edu\/insights\/wp-json\/wp\/v2\/subjects?post=633773"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}