The rise of sovereign wealth funds.

AuthorWolf, Greg
PositionSPECIAL SECTION: Resource Development

Relatively new, but increasingly important, players on the global investment scene are the Sovereign Wealth Funds. These government-controlled investment vehicles vary considerably in size and scope, as well as by their particular investment strategies and policies, but they are a formidable force in the markets and their reach can be felt in all corners of the world, including Alaska.

The capital for these funds typically from excess foreign currency reserves earned from exports or from income derived from commodities such as oil and gas. China's sovereign wealth fund would be an example of the former, while Norway's fund would be an example of the latter. By and large, Asian funds arose from export earnings, while Middle Eastern, European, and American funds arose from commodity earnings. Most of these funds invest globally. Some funds dedicate a certain percent-age of their fund portfolio for investment in their own countries.

Current estimates value the holdings of the sovereign funds at close to $6 trillion. These holdings encompass a wide variety of financial assets such as stocks, bonds, real estate, precious metals, and other investable instruments. The number of sovereign funds, and their assets under management, have increased dramatically in recent years. According the Sovereign Wealth Fund Institute, since 2005, thirty-two new funds have been established, and between 2008 and 2012, the assets of sovereign wealth funds increased by 59 percent. Two-thirds of these funds have come into existence since 2000, making them a relatively new player in global financial markets.

Alaska is home to the largest sovereign fund in the United States. With assets of some $46 billion, the Alaska Permanent Fund ranks 22nd among the world's funds. By comparison, Norway's Government Pension Fund Global, like Alaska, a beneficiary of oil revenues, is the world's largest fund at $732 billion in assets. The Norwegian fund has holdings in 7,500 foreign companies. In Europe alone, it has a more than a 2 percent average stake in all publically-listed companies. It targets a 4 percent annual rate of return on its investments.

In addition to Norway, other countries with very large funds include Saudi Arabia, United Arab Emirates, China, Singapore, and Russia.

Differing Investment Policies

Investment policies governing the funds differ significantly. Some seek only to obtain a reasonable annual return by managing to outperform the index of the asset classes...

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