SPECI
AL
SEC
T I O N International Trade Sovereign
Wealth
Update
Number of funds and
assets continue to grow
By Greg Wolf
State-sponsored investment funds, bet- ter known as sovereign wealth funds, continue to rise in economic clout as
the number of these funds grows along with
the assets they manage. While these govern-ment-controlled investment vehicles vary
considerably in size and scope, as well as by
their particular investment strategies and
policies, they are a significant force in the financial markets and their impact can be felt
in all corners of the world, including Alaska.
Typically, the source of the capital for these
funds originates either from excess foreign
currency reserves earned through exports or
from income derived from commodity sales
such as oil and gas. China’s sovereign funds
would be an example of the former, while
Norway’s would be an example of the latter.
Generally speaking, Asian funds arose from
export earnings while Middle Eastern, European, and American funds arose from commodity earnings. Most of these funds invest
globally. Some of them dedicate a certain
percentage of their portfolio for investment
in their own countries.
According to the Sovereign Wealth Fund
Institute, there are now seventy-nine sovereign funds. The value of their holdings is estimated to be $7.5 trillion as of December 2017.
These holdings encompass a wide variety of
financial assets including stocks, bonds, real
estate, precious metals, and other investable
assets. They also include so-called “
alternative investments” managed by hedge funds,
private equity, and venture capital funds.
Alaska is Largest
US Sovereign Fund
While Alaska was not the first American state
to establish a sovereign wealth fund—that
distinction belongs to Texas—it is home to
the largest fund in the United States. With assets of approximately $61 billion, the Alaska
Permanent Fund currently ranks 21st among
the world’s funds, ranking just below Libya
($66 billion) and just above Kazakhstan ($60
billion). By contrast, at $999 billion, Norway’s
Government Pension Fund Global is the
world’s largest fund and is widely expected to
become the first trillion dollar fund, having
touched that milestone briefly during 2017.
In addition to Norway, other countries with
very large funds include China, the United
Arab Emirates, Kuwait, Saudi Arabia, Hong
Kong, and Singapore.
As noted, Alaska is home to America’s largest single fund at just over $60 billion. However, Texas has two sizable funds—the Texas
Permanent School Fund ($37 billion) and
the Permanent University Fund ($17 billion).
Taken together, Texas has approximately $54
billion is sovereign assets. The Texas funds
date back to the 1800s. The permanent School
Fund was established in 1854 as a way to fund
primary and secondary schools while the Permanent University Fund was set up in 1876 to
provide funds for the University of Texas system and the Texas A&M system.
Other American states that have, for various reasons, established a sovereign fund include Wyoming, New Mexico, North Dakota,
Montana, Louisiana, Alabama, Utah, Idaho,
and, most recently in 2014, West Virginia.
The Alaska Permanent Fund is unique
among all sovereign funds with its annual
cash dividends paid out to each eligible citizen from the fund’s earnings. Since the fund
was established in 1976, more than $24 billion has been distributed in the form of dividend payments to its citizens.
Investment policies governing the sovereign funds vary considerably. Most, of course,
seek to achieve a reasonable rate of return
consistent with a commensurate rate of risk.
Typically, they measure the success or failure
of their strategy against an index of the par-
ticular asset class invested in. Others seek not
only this but also to attain “strategic objec-
tives” to benefit their country. For example, a
country that is energy poor might choose to
invest in companies, regions, or projects that
are involved with energy production. A coun-
try that is attempting to attract a particular
industry to its shores may make investments
in companies engaged in that industry or in
the infrastructure necessary to make their
country more attractive to that industry.
Some countries are more aggressive than
others in terms of the types of investments
they are willing to make in order to achieve a
particular goal. A good example is Singapore
and one if its funds, Temasek Holdings. This
fund was established in 1974 and currently
has assets of $197 billion under management.
In pursuing economic development objec-
tives, Singapore has a history of being proac-
tive in their attainment. A recent example is
Pavilion Energy. Already a major player in oil
storage, refining, distribution, and trading,
Singapore is now seeking to do the same with
the Asian LNG (liquid natural gas) market.
To accomplish this, the Singapore govern-
ment, through Temasek, established Pavil-
ion Energy. The company, launched in 2013,
aims to help Singapore become an important
player in Asia’s growing LNG market. It will
do so through investments in key LNG assets
The Alaska Permanent Fund
is unique among all sovereign
funds with its annual cash
dividends paid out to each
eligible citizen from the fund’s
earnings. Since the fund was
established in 1976, more
than $24 billion has been
distributed in the form of
dividend payments to its
citizens.
