You’ve heard of mutual funds, hedge funds and pension funds, but have you heard of Sovereign Wealth Funds? It may be surprising to find out that sovereign wealth funds (SWFs for short) are projected to have over $10 trillion in assets by 2012.
What is a Sovereign Wealth Fund?
A sovereign wealth fund is essentially an investment fund set up by a government for the purpose of long term investment of surplus funds. Not all governments have SWFs, because as you may have noticed as of late, not all governments have surpluses. For example, the only Canadian provincial government with an SWF is Alberta – owing to it’s royalties on natural resources which have been a cash cow for that province.
The top three SWFs worldwide have assets of roughly $1.5 trillion – originating from oil royalties and revenues.
What Do They Invest In?
Anything they please.
What Are The Investment Management Costs?
We’re dealing with some of the largest investment funds in the world so of course they are going to get institutional investment management pricing which is lower than retail pricing (what you and I pay), and it is much more negotiable too, meaning they will pay on the low end of institutional rates. For example, the Alberta Heritage Savings Trust Fund which has total assets of about $14 billion paid an expense ratio of 0.09% in 2008. This covers investment management into the following areas: stocks, bonds, real estate, private equity, and hedge funds.
For a deeper look inside an SWF, click here to view the Alberta Heritage Savings Trust Fund. I should point out that the investment manager (AIMCo – Alberta Investment Management Company) is looking for a new CIO (Chief Investment Officer)… :)
But wait a sec… What DO they invest in? When you run a fund whose assets are well over half the total market cap of the entire S&P 500, you can’t just buy an index fund!
Nor are you limited to publicly traded stocks in the US. There are about 170,000 companies in the US with revenues over $10 million per year. Only about 20,000 are not public. A lot of public companies at the top of the S&P 500 are very, very big, but what I’m getting at is that the private equity market is massive.
There is also debt instruments, and of course the rest of the world.