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Group Members:Chang Meng Han Chang Chiao Min Lin Chun Tse Liu Lu

Sovereign Wealth Funds: Trends, Opportunities and Concerns

FINANCIAL MARKETS, GOVERNANCE AND REGULATION FINAL REPORT

Professor: Pierre Francotte

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Introduction

What is Sovereign Wealth Fund? State-owned investment fund investing globally in real and financial assets

Purpose

1

3

2

4

StabilizationFund

SavingFund

DevelopmentFund

Pension Reserve Fund

Funding

Foreign-exchange reserves

surplus of natural resource

Sovereign Wealth Funds

Country SWF name Asset(billion USD)

Transparency index

Norway Government pension fund-global 893 10

UAE-Abu Dhabi Abu Dhabi Investment Authority 773 6

Saudi Arabia SAMA foreign holdings 757 4China China Investment Corporation 653 8

China SAFE investment company 568 4

Kuwait Kuwait investment authority 548 6

China-Hong Kong Hong Kong monetary authority investment portfolio

400 8

Singapore Government of Singapore investment corporation

320 6

China National social security fund 202 5

Singapore Temasek holdings 177 10

Top 10 players

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Difference from nation-run entity

State-owned enterprises

foreign-exchange reserve

• Purpose of operating• short-term currency stabilization• liquidity control

• Capitalization: shareholders, stock• focus on the operation in specific

industry or field

nation-run entity

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Pros and Cons of SWFs

Content TitlePros

The risk of investment target or misallocationCons

Social welfare, Sustainable development

Capital market stabilizing

Active using idle capital

Home market :

Global market :

Liquidity improvement and market development

Pros Market stabilizing

Protectionism or National security concern

Lack of transparency and regulation

Cons

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Prevailing Concerns

Text1

TransparencyInvestment Strategy

Inside Information

• Risk Management• Performance Assessment

• Recipient Countries• Home Countries• Global Market

• Openness of the market• Behave like other investorsAmerica and Europe appeal to

establish a code of conduct for sovereign wealth funds with

voluntary application

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Governance and Regulations of SWFs

Recipient Country Policies(OECD)

Santiago Principles

(IFSWF) +• To help maintain a stable global financial system and

free flow of capital and investment

• To comply with all applicable regulatory and disclosure requirements in the countries in which they invest

• To invest on the basis of economic and financial risk and return-related considerations

• To have in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability.

• Legal framework, objectives, and coordination with macroeconomic policies

• Institutional framework and governance structure

• Investment and risk management framework

Santiago Principles- 24 GAPP

Track Record of Implementation

The International Forum undertook an internal survey of members’ experiences in applying the Santiago Principles in 2010.

Most members thought transparency is the key element.( Botswana’s Pula Fund & Norges Bank Investment Management)

Some of the largest and most powerful SWFs in the Middle East didn’t comply with the Santiago Principles.(Abu Dhabi Investment Authority, Kuwait Investment Authority)

In 2013, the survey told that their members had some improvement in GAPP Implementation, and Truman (2013) also observed the same thing.

SWF Scoreboard

• Put some pressure on their members who didn’t participate in the survey.

• Persuade those non-IFSWF members to join the group

Truman’s (2013) findings is quite similar to the IFSWF survey.

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Case study 1: Norway Government pension fund global

Management Structure: Norge bank investment /Ministry of Finance /Council on Ethics

Money sources:

Purpose:Solve the non-renewable petroleum resources , smooth out the highly fluctuating in oil price and take precautions of an aging population problem

By petroleum sector, including the taxes from companies and payment for license to explore, etc.

Established 1990

Asset US＄ 893 billionOrigin Oil

Transparency rating 10

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-30

-20

-10

0

10

20

30

Annual return and Accumulated return. Percent

annual retuns average returns since 1998 benchmarks indices

Norway - Government Pension Fund Globa

New Zealand - Superannuation Fund

Australia - Future Fund

Chile - E/S Stabilization Fund and Pension Reserve Fund

US/Alaska - Alaska Permanent Fund

Timor-Leste - Petroleum Fund

Singapore - Temasek Holdings

Canada - Alberta Heritage Savings Trust Fund

Azerbaijan - State Oil Fund

Singapore - GIC

Trinidad and Tobago - Heritage and Stabilization Fund

China - China Investment Corporation

Korea - Korea Investmenty Corporation

United Arab Emirates - Abu Dhabi Investment Authority

Kuwait - Kuwait Investment Authority

Russia - National Wealth Fund and Reserve Fund

Botswana - Pula Fund

Mexico - Oil Revenues Stabilization Fund

Qatar - Qatar Investment Authority

Bahrain - Future Generations Reserve Fund

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

94%

92%

90%

85%

83%

81%

79%

77%

71%

69%

65%

61%

58%

53%

52%

46%

44%

39%

31%

24%

Santiago Compliance Index 2013

Santiago Compliance Index 2013

Point principle of linaburg-maduell transparency index

+1 Fund provides history including reason for creation, origins of wealth,and government ownership structure

+1 Fund provides up-to-date independently audited annual reports

+1 Fund provides ownership percentage of company holdings and geographic locations of holdings

+1 Fund provides total portfolio market value,returns and management compensation

+1 Fund provides guidelines in reference to ethical standards, investment policies ,and the enforcer of guidelines

+1 Fund provides clear strategies and objectives

+1 If applicable ,the fund clearly identifies subsidiaries and contact information

+1 If applicable, the fund identifies external managers

+1 Fund manage its own web site

+1 Fund provides main office location address and contact information such as telephone and fax

Investment strategies

• The portfolio is balanced• Invest abroad only• Well diversified• Do not control over the target enterprise• Never manipulate a single company's

stock market price

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Case study 2: Sovereign Wealth Funds in China

• Fund rankings in 2013Ranks Name Asset ($Billion) Inception

4 China Investment Corporation 652.7 2007

5 SAFE Investment Company 567.9 1997

9 National Social Security Fund 201.6 2000

Newly-established

Huge sizes• Investment of SWFs in China

CIC SAFE

Investment Focus Before subprime crisis: financial institutionsAfter failure: gasoline, airline and so on

Unclear

Companies invested

Before crisis: Blackstone, Morgan StanleyAfter: GDF Suez, Heathrow Airport Holdings Limited

Royal Dutch Shell, BP Amoco, TESCO, Barclays Bank and so on (ratio of share holding< 1%)

Amount 21 billion dollars in 200858 billion dollars in 200936 billion dollars in 2010

Five million pounds in the British security market

Source: http://www.swfinstitute.org/fund-rankings/Source :Feng, L. A study of economic effects of sovereign wealth funds [D]. Zhengjiang University

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Case study 2: Sovereign Wealth Funds in China

SWFs in China are unclearly oriented, and the ownership of the capital is still controversial.

an investment fund

a fund manager

Ownership of SWFs in China

• Inconsistent with Santiago Principles

SWF

Risk Control

CIC and SAFE do not publish their own risk management standard

It is impossible for others to know how they judge risks.

The general approach to the SWF’s risk management framework should be publicly disclosed”.

Santiago Principles 22.2. Subprinciple!?

Santiago Principles 1.2. Subprinciple

The key features of the SWF’s legal basis and structure, as well as the legal relationship between the SWF and other state bodies, should be publicly disclosed

!?

Norway - Government Pension Fund Globa

New Zealand - Superannuation Fund

Australia - Future Fund

Chile - E/S Stabilization Fund and Pension Reserve Fund

US/Alaska - Alaska Permanent Fund

Timor-Leste - Petroleum Fund

Singapore - Temasek Holdings

Canada - Alberta Heritage Savings Trust Fund

Azerbaijan - State Oil Fund

Singapore - GIC

Trinidad and Tobago - Heritage and Stabilization Fund

China - China Investment Corporation

Korea - Korea Investmenty Corporation

United Arab Emirates - Abu Dhabi Investment Authority

Kuwait - Kuwait Investment Authority

Russia - National Wealth Fund and Reserve Fund

Botswana - Pula Fund

Mexico - Oil Revenues Stabilization Fund

Qatar - Qatar Investment Authority

Bahrain - Future Generations Reserve Fund

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

94%

92%

90%

85%

83%

81%

79%

77%

71%

69%

65%

61%

58%

53%

52%

46%

44%

39%

31%

24%

Santiago Compliance Index 2013

Santiago Compliance Index 2013

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