Estimates of Sovereign Wealth Fund (SWF) investments in international equity continue to drop. In December 2007, the International Monetary Fund (IMF) and Morgan Stanley estimated global SWF assets at $3tr, with a forecasted size of between $12 and $15tr by 2015. A new report sets the size of the ten largest SWF assets at $2.2tr and their equity holdings at about $1tr.

In terms of global financial assets by investor class, pension funds led the group as of September 2009, with more than $28.2tr in AUM, accounting for 62% of the global equity capital market, according to RiskMetrics and the Investor Responsibility Research Center Institute (IRRCI). Next are mutual funds with $26.2tr in AUM, followed by insurance companies ($18.8tr), foreign exchange reserves ($7.3tr), SWFs ($2.6tr), hedge funds ($1.5tr) and private equity funds ($1.2tr).  

Among the factors which have resulted in a significant drop in SWF assets in 2008 and 2009 are a decrease in portfolio value due to the global market downturn, a drop in oil prices since late 2008 resulting in decreased capital flows into oil-based SWFs, a slowdown in the demand for exports of Asian economies such as China and an inward focus of SWF host governments to stimulate local economies and recapitalise troubled.

Globally, 64% of the SWFs are sourced from oil and gas-related commodity revenues while the balance is capital generated from non-commodity sources in export-based economies. In such cases, the SWF receives a transfer of payment from foreign excess reserves. Almost half (46%) of all sovereign assets are held by Middle East SWFs, representing the highest geographical concentration of such assets worldwide. Asia is next with 35% of SWF assets followed by Europe (13%).

Santiago principles

The report also considers how many SWFs comply with the Santiago Principles. These are 24 voluntary practices introduced in October 2008 to which SWFs are signatories. RiskMetrics asks them to disclose their level of compliance, source of funds, legal structure, governance framework, description of investment policy and approach to risk management. The principles were worked out by the International Working Group of SWFs under the aegis of the IMF. The 10 SWFs included in the study saw the majority (60%) fully comply with the principles.

One of the weakest areas of non-compliance was disclosure of financial information. Four of ten SWFs do not comply in this category. Overall, the Qatar Investment Authority is at the bottom of the compliance list behind the Abu Dhabi Investment Authority. The Australian Government Future Fund, the Government Pension Fund Global (Norway) and Temasek ranked at the top of the list. Norway’s SWF attained the highest full compliance rating (89.5%).

“Full compliance tends to be very high when it comes to disclosure of legal and governance frameworks,” notes the study. “Most of the SWFs clearly state their type of legal entity and their governance structure. However, disclosure is generally weaker for financial information, investment performance, investment policy, ownership rights and engagement approach.” The ten SWSs in the study are Abu Dhabi Investment Authority, Australian Government Future Fund, China Investment Corporation, Government of Singapore Investment Corporation, Norwegian Government Pension Fund, Government Pension Fund Global, Kuwait Investment Authority, Libyan Investment Authority, Qatar Investment Authority and Russia’s Stabilization Fund.

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