חומר רקע
Presentation to the Knesset
February 2022
An Overview of Sovereign
Wealth Funds
Strictly confidential
2
What is a sovereign wealth fund?
“Special-purpose investment funds or arrangements that
are owned by the general government. Created by the
general government for macroeconomic purposes, SWFs
hold, manage, or administer assets to achieve financial
objectives, and employ a set of investment strategies
that include investing in foreign financial assets.”
— Sovereign Wealth Funds Generally Accepted Principles
and Practices, “The Santiago Principles”
But what does this actually mean?
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset, February 2022
Strictly confidential
3
SWFs are a extremely diverse group of investors. There are three main types and
hybrid funds.
Types of sovereign wealth fund
Natural-resource revenue savings
Foreign-exchange diversification
Pension reserve
Exchange-rate stabilisation
Smoothing government spending across the commodity cycle
Stewarding state-owned enterprises to create national & regional champions
Enhancing local stock-market liquidity (IPOs, investing in local funds)
Promoting economic development by investing in strategic sectors
Attracting long-term foreign direct investment as a promoter or partner
Savings and stabilisation
Savings and strategic
Savings, stabilisation and strategic (“Triple S”)
Savings
Stabilisation
Strategic
Hybrid
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
A permanent fund promotes intergenerational equity by maintaining
a stable level of income
4
Time, t
i, GVT
Income
Investment income replaces
natural resource revenue
0
%
100
%
t0
t2
Non-resource tax
base
Investment income
Share of income
from natural
resources
t1
•
A state with natural resource revenue
and a permanent fund receives three
sources of income
•
Production begins at point t0, where
natural resource income is significant.
•
At point t1, income is balanced
between investments and natural
resources
•
At resource depletion, point t2,
investment income has replaced
natural resource income
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Natural resource and investment income streams face different risks
5
Risks to natural resource income
•
Cyclical volatility
•
A permanent shift in commodity
use and prices?
Policymakers have imbedded
assumptions on natural resource
income in tax and royalty
structures
•
Severance taxes assume
commodity price and production
volume risk
•
Taking less risk implies capturing
a smaller share of resource
revenue
•
Goal: capturing a fair share of
resource income while taking
risks the state can afford
Risks to investment income
•
Financial market volatility
•
Permanent change in asset return
expectations
Financial assets face unique
governance risks
•
Politicians spend the money
prematurely
•
Mismatch between investment
structure and mission
•
Investing too
aggressively/conservatively
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
How to mitigate risks and achieve intergenerational equity
Time, t
i, GVT
Income
Investment income replaces
natural resource revenue
0
%
100
%
t0
t2
Non-mineral tax
base
Investment income
Share of income
from natural
resources
t1
Three tools for balancing income
streams over time
•
Adjust the natural resource income
stream
- royalty structure
- improve the economics of
production via policy
•
Adjust the investment income
stream
- investment policy
- investment beliefs and how you try
to achieve them
•
Change the saving/spending policySaving/spending policy
6
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Strictly confidential
7
Mega Trends
Since the emergence of Sovereign Wealth Funds 10+ years ago, the investment
climate has changed radically. Here some of the major trends are identified1
1.
Deglobalisation
2.
Populism
3.
Technological breakthrough &
disruption
4.
Demography
5.
Climate change
6.
Challenges to corporate earnings
7.
Changed inflationary regime
8.
Fiscal-monetary co-ordination
9.
Change in Fair Values
10. Decline of Sovereign Bond
Duration in Portfolio Construction
Source:”A New Invest Order”, Position Paper by the Australian Future Fund, September 2021
Strictly confidential
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Originally created for stabilisation or savings, more SWFs are being created for
strategic purposes.
The evolution of sovereign wealth funds
0
1
2
3
4
5
6
7
8
9
101953195619581974197519761980198119831984198519901992199419992000200120022003200520062007200820112012201420152016201720182019
Hybrid
Strategic
Stabilisation
Savings
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset -February 2022
Strictly confidential
9
1
2
2
3
5
5
8
15
Stabilisation
Pension Reserve
Savings, Stabilisation, Strategic
FX Diversification
Savings & Strategic
Stabilisation & Savings
Long-term Savings
Strategic & Development
Half of our members have some form of domestic strategic or development
mandate.
.
Our members have a diverse range of mandates
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Strictly confidential
Today, the IFSWF has a truly global membership
We have 35 full members and 6 associate members from every inhabited
continent.
10
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Strictly confidential
11
The Santiago Principles®
All members voluntarily apply the Santiago Principles®: the accepted standard
for sovereign fund governance, investment practice & risk management.
The Santiago Principles are a code of conduct
that outlines good practices for SWFs:
– Pillar 1: Objectives and coordination with
economic policy
– Pillar 2: Institutional framework and
governance structure
– Pillar 3: Investment and risk
management
IFSWF members use the Santiago Principles
to:
– Benchmark and their practices and
structure
– Serve as a framework for peer learning
– Continuously improve investment &
financial outcomes
Our members are increasingly transparent
about how they apply the Principles::
– In 2020, all 34 full members published
their Santiago Principles self-assessments
– In February 2017, 29 members published
their self-assessments
– In 2016, 12 members published case
studies on the value of implementing the
Principles
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Strictly confidential
12
Pillar 1: Sovereign Wealth Fund Legal Basis
Most IFSWF members organised as one of four legal frameworks:
•
Presidential, Ministerial or Sovereign decree
–
State Oil Fund of Azerbaijan
–
State General Reserve Fund
–
Qatar Investment Authority
•
Act of a legislative body
–
Future Fund (Australia)
–
Abu Dhabi Investment Authority
–
Nigeria Sovereign Investment Authority
•
Laws related to fiscal or budgetary matters or
management of natural resources
–
Budgetary Stabilisation Fund (Mexico)
–
Economic Social Stabilisation Fund & Pension Reserve Fund (Chile)
•
Line on a balance sheet without an independent legal
personality
•
Institution established under local company law
–
Samruk-Kazyna (Kazakhstan)
–
Temasek Holdings (Singapore)
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Strictly confidential
13
Pillar 2: Institutional Basis & Governance Framework
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Strictly confidential
14
Savings
Stabilisation
Strategic
Long-term investment horizon
Higher risk tolerance
Invest to maximise risk-adjusted returns
Priorities are: safety, liquidity, return
Invest in strategic companies and projects at home for financial
return and economic growth
Pillar 3: Investment and Risk Management Framework
Increasing risk
Increasing Capacity Required
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Strictly confidential
15
Creating a climate change strategy
Investment context
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Strictly confidential
16
The Authoritative Data Provider
We undertake research with the support of members to provide authoritative data
and analysis about sovereign wealth fund activity.
IFSWF regularly works with our members and
external organisations for additional research
projects and webinars drawing on interviews with
and surveys of our members
https://www.ifswf.org/research
IFSWF publishes an annual review of
SWF investment behaviour using our
proprietary database.
www.ifswfreview.org
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
17
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Source: IFSWF Annual Review 2021
Investment in Infrastructure, Real Estate and Public Equity
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IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Changing Investment Landscape for Sovereign Wealth Funds
Source: IFSWF Annual Review 2021
19
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022
Source: IFSWF Annual Review 2021
Domestic and overseas investment by Sovereign Wealth Funds
IFSWF – An overview of Sovereign Wealth Funds - Presentation to the Knesset - February 2022