Sovereign wealth funds: Things you need to know

SWFs are state-owned investment funds typically investing in financial assets, property and precious metals. They are different from foreign-exchange reserves held by central banks. SWFs usually invest for the long term, while management of foreign-exchange reserves mostly comprises short-term currency stabilisation and liquidity management.
SWFs are normally created when governments have budgetary surpluses and have little or no offshore debt. They usually fall into two main types: saving and stabilisation. Saving SWFs build up savings for future generations, while stabilisation SWFs are created to reduce volatility of government revenues, to counter boom-bust economic cycles.
Regarding asset size, no official data are available. But according to the SWF Institute, assets of SWFs were believed to exceed US$4.7 trillion (Bt145.05 trillion) as of July. Those countries where SWFs were funded by commodities’ exports, primarily oil and gas exports, had SWFs totalling $2.7 trillion at the end of last year. Non-commodity SWFs totalled $1.5 trillion. Typically non-commodity SWFs are funded by transfer of assets from official foreign-exchange reserves, or in some cases, from government budget surpluses and privatisation revenue. Asian countries account for the bulk of such funds.
SWFs are notoriously secretive. Many of these funds do not disclose their size, source of funds, investment goals, or related-parties transactions and investment holdings with dubious internal checks and balances. As a result, some countries worry that foreign investment by SWFs raises national-security concerns because the purpose of the investment might be to secure control of strategically important industries for political rather than financial gain.
Consequently, SWFs face many legal and political hurdles in some of the countries in which they invest. For example in the United States, SWFs are generally considered foreign-government entities whose investments in the US are subject to review by the Committee on Foreign Investment. This committee acts as a gatekeeper, tasked with enforcing US laws that restrict foreign investments that may impair national-security interests. For example, foreign control of US nuclear assets or airlines is prohibited.
In Europe, Germany recently approved a law requiring parliamentary approval for foreign investments that endanger national interests. Specifically, it will affect acquisitions of more than 25 per cent of a German company’s voting shares by non-European investors.
Interestingly, US law treats SWFs more favourably than it does private foreign investors, as long as the SWF does not engage in commercial activity other than portfolio investments, which are defined as the acquisition of non-controlling stakes. The funds can avoid both income and withholding taxes on their US investments.
As for the European Union, member states’ attitudes towards and policies regulating SWFs vary widely. The United Kingdom is the most liberal, with its approach aimed at attracting foreign investment, while Germany and France are more restrictive.
Whether we go ahead with the establishment of an SWF or not really depends primarily on three things: How big should the fund be, who will be the fund manager, and what will the fund’s main objectives be? No easy answers here.
Even if the Pheu Thai Party gets its way, it remains to be seen how successful the fund will be, given the challenges faced by other SWFs. Personally, I take the view that if nothing is ventured, nothing is gained. It’s a brave new world out there and unless we take that first step, we will never reach for the stars.
 
Teera Phutrakul, certified financial planner, is founder of JT Financial Planners, an independent financial planning firm. He may be contacted at www.jtplanner.com.