Sovereign Wealth Funds: Building intergenerational equity

Image source: institutionalinvestor.com
Image source: institutionalinvestor.com

 

It was in the early 1950s when the Kuwait Investment Authority established the world’s first sovereign wealth fund (SWF) as a way for the Gulf state to diversify its investments, anchored largely by its excess revenues from oil. With its primary role as a practical solution for a nation with a budgetary surplus, it has been later on adapted and created by other resource-rich and export-orientated sovereignties.

SWF is a resource that helps stabilize a country’s economy. In definition, it is a government-owned fund allotted in investing into various financial assets for two main purposes: to gather savings for the country’s future generation, and the diversification of their total income base.  This is a more practical approach in order to take advantage of a nation’s excess money, funneling it into investments than just letting it stay idle in the central bank.

Sovereign wealth funds are classified depending on how they are financed: commodity and non-commodity.  Commodity SWFs are primarily created by revenue surpluses from exporting major commodities such as oil, metallic ores, and diamonds; the latter, meanwhile, is usually funded by an excess of foreign currency reserves from current account surpluses.

Many countries establish SWF and are motivated by different economic and political circumstances. One example is how the United Arab Emirates create a huge part of their funds from their oil exports. Because of this, they need a reliable solution to protect the surplus reserves from oil-based risks and this is where SWF does its work—allowing the country to sustain or even accumulate more profits.

In the age of globalization, SWFs have been proven to contribute in developing assets in need of a substantial capital.  Because of its unique characteristics and its long-term benefits, countries around the world can create a brighter economic future for their citizens and the generations to come.