Economics of Sovereign Wealth Funds

Chapter 18 Long-Term Implications of the Global Financial Crisis for Sovereign Wealth Funds

Udaibir Das, Adnan Mazarei, and Han Hoorn
Published Date:
December 2010
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Andrew Rozanov

This crisis will leave an indelible mark on the psyche of every sovereign fund investor.

– Senior reserve management official at a major Asian monetary authority, Institutional Investor Sovereign Funds Roundtable, Singapore (2008)1

The global financial crisis that began in 2007 shook the foundations of modern financial markets and tested some core assumptions on which our understanding of those markets is based. Sovereign wealth funds (SWFs) were caught in the middle of these turbulent developments: the dramatic drop in commodity prices, the collapse of world trade, and the reversal of foreign capital flows undermined the funding sources of many SWFs around the world, just as their portfolios were being decimated by sharp declines across various asset classes. And this happened just when many SWFs found themselves being directed by their sponsoring governments to help support domestic spending and investment and to help stabilize domestic banks and financial markets.

This situation had a direct impact on the day-to-day operations and immediate future plans of many SWFs. The first response was to refocus on liquidity: many institutions that were moving into riskier asset classes in search of higher yields and diversification benefits put those plans on hold and started building up large liquidity buffers. This knee-jerk derisking of investment programs led to an increased appetite for traditional reserve assets, such as the U.S. dollar and U.S. government paper.

Second, the pressing need to provide emergency support to domestic economies and institutions led to an increased focus—and in some cases an entirely new focus—on domestic markets. Some countries, such as Norway and Chile, responded by drawing on their sovereign wealth, either directly or indirectly, to support budget spending, while leaving intact the core principle of keeping all of their SWF investments offshore.2 But other nations with SWFs went further. Countries as diverse as France, Ireland, Kazakhstan, the Republic of Korea, Kuwait, Qatar, the Russian Federation, and the United Arab Emirates found themselves having to become much more creative, flexible, and pragmatic in their deployment of sovereign wealth in domestic markets.3

Policy measures drawing on sovereign wealth to deal with the crisis are logical and understandable. However, they point to a bigger set of issues that SWFs and their sponsoring governments need to consider in the longer term, once the crisis subsides. For example, many emerging-market economies may want to revisit their criteria for determining reserve adequacy—monetary authorities in some countries may have underestimated the amount of U.S. dollar liquidity they actually need in times of distress, especially in the context of once-in-a-lifetime global financial crises. No hard and fast, universally applicable rule aids in the calculation of sufficient levels of reserves. It appears to be more art than science, and adequate levels will be different for each country.4 However, one fact is certain: countries hit hard by the crisis will most likely err on the side of caution and set aside more, rather than less, reserves for prudential policy purposes going forward.

Related to the issue of how much protective liquidity to maintain in a sovereign portfolio is the issue of the best way to structure and manage the remaining part of the portfolio. The painful, dramatic increases in correlations across all risk asset classes in the global financial crisis will most likely prompt some SWFs to revisit the validity of key tenets of modern portfolio theory. In principle, many of these funds represent patient capital with high risk tolerance and very long investment horizons. As such, they should be ideally positioned to invest large proportions of their wealth in broadly diversified portfolios of higher-risk and lower-liquidity assets. In this context, an occasional spike in short-term volatility and correlations is part of the price to pay for higher expected long-term returns.

However, the crisis has put to the test a number of other important aspects of sovereign wealth management. Some SWFs discovered that the range of contingent liabilities leading to potential calls on their capital turned out to be much broader than originally anticipated, while others learned that the political establishment, the media, and the general public in their home countries have much lower tolerance for short-term volatility and unrealized investment losses than modern portfolio theory would prescribe. Part of the solution would be to ramp up public relations and education campaigns. But the bigger and much more difficult task will be to go back to the drawing board and undertake a comprehensive review of the sovereign’s broadly defined assets and liabilities and determine what they mean for the optimal structure and management of the SWF.

Another long-term consideration coming out of the current crisis is the role of the state in the domestic economy. A government acting as a portfolio investor and a minority shareholder in a foreign company, which is located and regulated outside its jurisdiction and control, is quite a different matter from an owner government that also happens to be the rule-setter and regulator.5 While the crisis certainly favors a pragmatic approach over ideological dogma, it is nonetheless important not to lose sight of the difficult lessons—which many societies learned the hard way—about corruption, waste, and inefficiency that often result from government interference.

The issue, however, is more nuanced than simply whether a government should be an active market participant and an actor in its own domestic economy. Rather, one should consider how to structure a government’s participation to mitigate the concomitant risks, while allowing the investee company to succeed in a free and fairly regulated market economy. In deliberating this question, it may be useful to draw on the practices of different sovereign funds around the world that are currently outside the narrowly defined scope of SWFs, but that have the unique experience of investing in and running domestic business operations across a variety of sectors and industries—funds such as Mubadala Development Company of Abu Dhabi, Khazanah Nasional Berhad of Malaysia, State Capital Investment Corporation of Vietnam, or Samruk-Kazyna National Wealth Fund of Kazakhstan, to name just a few.6

The rest of this chapter discusses in more detail the two long-term implications highlighted above: the importance of analyzing and managing SWFs in the context of broader national assets and liabilities, and the need to recognize and mitigate the risks that come with an increased role for the state in the domestic economy.


The best way to minimize risk is to scale down the size of foreign currency reserves.

–Wu Xiaoling, Vice President of National People’s Congress Financial and Economic Affairs Committee, ex-Deputy Governor of the People’s Bank of China and former chief of SAFE, China (Wang, 2009)

Just like other large institutional investors, long-established SWFs with meaningful exposure to risk assets suffered steep, double-digit percentage-point drops in portfolio wealth.7 But what makes this crisis even more challenging for many of them is the simultaneous impact on the liability side of their balance sheets—a sudden drop in funding combined with increased calls on diminishing capital. The crisis stressed not only asset portfolios of SWFs, but also their liabilities, and it did so along both dimensions—sources and uses of funds.

With regard to sources of funds, approximately two-thirds of total SWF assets are derived from hydrocarbon and other commodity-export revenues and constitute genuine public sector savings. Therefore, as per-barrel oil prices crashed from a peak of US$147 in July 2008 to about US$35 by the end of December 2008, most oil-rich SWF nations saw a marked decrease in their funding flows. Another important group of SWFs, located in Asia and funded from excess foreign exchange reserves, faced a similar shift in their funding environment, as the collapse in international trade led to shrinking current account surpluses and as capital flight from emerging markets reversed previous capital account surpluses.8 These SWFs faced an additional complication: their assets are supported by local currency-denominated, interest-bearing liabilities that have been placed with domestic commercial banks and other domestic institutions. Some analysts argue, therefore, that heavy investment losses may potentially have negative implications broader in scope and more systemic in nature than originally envisaged.9

To what extent are these broader liability considerations taken into account when SWFs determine their asset allocation and investment strategies? This discussion first considers the case of a commodity-based fund and then turns its attention to an SWF funded with foreign reserves.

On the one hand, the logic of oil-to-equity transformation was well established long before the current crisis: a nonrenewable resource with mediocre long-term returns and very high volatility is gradually transformed into a broadly diversified financial portfolio with higher expected returns, lower volatility, and the potential to benefit multiple generations. (See Kjær, 2006, for a detailed account.) Within this framework, some oil-based funds carefully designed their asset allocations to avoid exposure overlaps with oil in the ground; for example, Norway reportedly looked into a commodity allocation for its SWF, but rejected it precisely for this reason, while Kazakhstan’s National Wealth Fund went even further and customized its developed-market equity investments by excluding any exposure to the energy industry.10 Anecdotal evidence also suggests that some of the larger and more established Middle Eastern SWFs have carefully structured their commodity exposures, taking into account oil in the ground.11

On the other hand, little evidence to date, at least in the public domain, indicates that any SWF is incorporating its physical commodity endowment into the formal asset allocation and portfolio construction process. But the crisis is refocusing people’s minds on the interplay between commodity prices and sovereign portfolio returns. Recently there have been a number of attempts to address this question: how does one account for oil in the ground when determining the optimal asset allocation for an oil-based SWF? And how does this optimal portfolio change over time as oil is extracted, exported, and converted into financial wealth? And what is the expected pace of this oil-to-equity transformation? Intuitively, one would want to extract and sell more oil when its real price is high and when equity is relatively cheap, and vice versa.

Academics and practitioners are just beginning to explore these issues by applying quantitative rigor and analytical models, but the first results are promising. Although the exact methodology and specific data used in these analyses may differ, they tend to point toward the same broad conclusion: a relatively new SWF representing only a small fraction of a nation’s total wealth, which includes oil in the ground, should invest fairly aggressively in growth assets such as public equities, but as the financial portfolio increases in size it should gradually be moved toward a more balanced combination of risk assets and safe bonds.12

Broadening the optimization procedure to explicitly include oil in the ground will not necessarily protect against periods like 2008, when risk assets and commodity prices dropped in unison—oil is not perfectly negatively correlated to equity and other risk assets, but rather is uncorrelated over the long term, which will mask the occasional subperiod of comovement in prices. However, rigorous optimizations based on hard numbers and scientifically defensible analyses will provide the necessary basis for communication and educational efforts to persuade politicians and the broader public of the need to take the long-term view and to be more tolerant of short-term risks and unrealized losses.13

However, the approach described above helps address only one part of the liability equation—source of funds. An equally important consideration is expected uses of funds, and to the extent these are contingent and difficult to quantify, statistical modeling may have its limitations. Still, an internally consistent and logical approach to liability profiling should be possible. For example, as it considers its approaches to sovereign wealth management, an oil-rich country with a relatively large, young, and growing population (e.g., Saudi Arabia) will probably focus more on the need to create plentiful employment opportunities, while a hydrocarbon-rich nation with a shrinking and aging population (e.g., the Russian Federation) will likely have a stronger focus on supporting and augmenting its pension system. And both countries will be considerably more constrained, at least in theory, than their peers with much smaller populations and only marginally smaller hydrocarbon endowments (e.g., Abu Dhabi and Qatar). Sovereign funds in the latter two economies have unique asset and liability profiles, giving them the maximum possible investment freedom:

  • among the world’s highest per capita hydrocarbon endowments,
  • among the world’s largest per capita financial and real asset portfolios,
  • lack of explicit liabilities attached to the assets of the funds,
  • comfortable financial cushion to cover implicit liabilities, and
  • culture of risk-taking and increased focus on real assets.

This combination of factors makes SWFs in relatively small but hydrocarbon-rich Gulf economies the ultimate pools of long-term and patient risk capital available anywhere in the world; they have the ability to deploy funds in search of both attractive financial returns and important nonfinancial benefits accruing to their economies, almost entirely unconstrained on the liability side of their balance sheets. In this light, it would be natural to expect them to continue investing not only in publicly listed securities, but also in private equity, real estate, infrastructure, venture capital, and other alternative assets, and to focus increasingly on transformational strategic investments.14

On the other end of the liability spectrum are large sovereign wealth owners in foreign exchange reserve-rich Asian nations. Historically, most of them—with the possible exceptions of Singapore and Brunei—have been somewhat reluctant accumulators of sovereign wealth. That accumulation was just a by-product of their exchange rate policies, and as such, it initially built up in the form of massive foreign exchange reserves at their central banks. As a result, these reserves did not constitute genuine public sector savings, but rather foreign assets funded in local currency debt markets, thus leading to a liability profile completely different from the typical commodity-based SWF.

Some countries then decided to follow the Singaporean model by carving out a portion of these reserves to form separate and independent SWFs (e.g., the Republic of Korea established the Korea Investment Corporation in 2005 and China created the China Investment Corporation in 2007). Other nations in the region (e.g., India, Japan, and Thailand) debated the relative merits of this approach, but as of the time of this writing in mid-2009, for various reasons decided against it.15 However, the public debate in some of these countries continues and will probably not subside as long as sizable domestic savings are effectively tied up in the form of local debt-funded, de facto sovereign wealth.

Some of these countries could consider alternatives to both endless reserve accumulation and establishment of separate SWFs. Open-minded and creative thinking about excess reserves in the context of broader national assets and liabilities could yield a number of ways to optimize the broader national balance sheet while at the same time shrinking the overall size of foreign reserves. For example, it may be constructive to explore whether some foreign assets currently residing in a domestic debt-funded foreign reserve portfolio might be more optimally swapped against such debt with the national pension fund. This would help domestic monetary authorities, who are reluctant holders of reserves in the first place, to shrink their balance sheet, while helping the national pension fund expand its allocation to foreign assets in one fell swoop without the associated market impact.

Other creative asset-liability management ideas may include the innovative use of exchange-traded funds or exchangeable bonds to dispose of a portion of excess reserves in an orderly and market-friendly way. Such actions by the official sector would not be entirely unprecedented: the Hong Kong Monetary Authority partially disposed of its domestic share portfolio, which it had accumulated during the defense of Hong Kong SAR markets against the so-called double play speculators in 1998, using a creative solution based on exchange-traded funds, while some European states in the past issued exchangeable bonds to reduce their stakes and lower their debt burdens. In 2009, UK Financial Investments (UKFI), the entity created to hold and manage the shares acquired by the British government in bailed-out domestic banks, is reportedly considering issuing an exchangeable bond (see Aldrick, 2009).

While most discussions to date surrounding SWFs have focused primarily on asset acquisition and asset management, the crisis has brought forward the importance of understanding and managing sovereign liabilities. Therefore, it would not be unreasonable to expect the SWF policy debate to become considerably broader in scope, encompassing both the asset and the liability sides of the national balance sheet.


The question … is not whether our government is too big or too small, but whether it works.

–Barack Obama, President of the United States (2009)

In the global financial crisis many nations with SWFs were forced to deploy some of their accumulated sovereign wealth domestically to support domestic economies and institutions. Although some of these measures took the form of straightforward stimulus packages and one-time increases in budget spending, many SWFs were also instructed by their governments to invest directly in domestic markets and institutions, often requiring changes in the SWFs’ investment guidelines and lists of eligible assets, and sometimes—as was the case in Ireland—even changes in the legislation governing the SWF. The appendix at the end of this chapter contains some specific examples of SWF-sponsoring governments taking bold and innovative action with regard to domestic investments by their sovereign funds.

The reserve-rich governments in emerging markets and in small developed countries were not alone in being forced by the crisis into massive domestic interventions. Authorities in some of the largest and most developed free-market economies, with sizable budget and current account deficits—countries like the United States and the United Kingdom—were also forced to intervene heavily and to take on, albeit very reluctantly, ownership of important chunks of their domestic economies. This happened on the back of massive bailouts of commercial and investment banks, insurance companies, and automobile manufacturers.16

To be sure, such reluctant accumulation of assets by governments in developed countries does not automatically make them owners of SWFs, certainly not as defined within the context of the Santiago Principles (IWG, 2008). However, even in a broader sense, the two phenomena differ in too many fundamental ways to allow them to be equated: differences of objective (temporary rescue versus long-term wealth management), control (ownership of last resort versus a minority stake on par with other shareholders), and management style (accelerating economic recovery with eventual reprivatization versus maximizing shareholder value in perpetuity).17

Despite these differences, even in the most optimistic scenario governments in the west will probably need to hold their newly acquired assets for a considerable time before they can safely and profitably return them to private ownership. In this context, one of the key questions is how a government with no asset-management experience, no proper institutional arrangements, and no specialist staff can assure the taxpayer that the acquired stakes will be managed in the most efficient and professional manner, in single-minded pursuit of a fiscally optimal exit. Put differently, how do we know that the authorities, in their capacity as temporary bank owners, will prioritize long-term profit maximization and sound risk management over short-term political dividends that may come from forcing banks to maintain lending to corporations and households regardless of risks and profitability? Or how do we know, for example, that the government will not be tempted to use its powerful new position in the automobile industry to force upon car companies a “green” agenda that does not necessarily make business and financial sense?

Typically, monetary authorities and regulators command a powerful presence in their respective financial markets in the best of times. When the government becomes the only source of support and liquidity among the carnage of a financial crisis and economic downturn, its relative strength and influence vis-à-vis the private sector increases dramatically. If the authorities then take on the role of a principal player in the domestic financial market, the power they project—and correspondingly, the damage they can do—can become overwhelming. Glen Moreno, who at one point worked as chief executive of Fidelity International and at the time of this writing is acting chairman of UKFI, put it colorfully and succinctly when he referred to his new employer as “Fidelity with nuclear weapons” (Wilson, 2009).

Arguably, the risks of mistakes and abuses are highest in countries with no history of the government running financial portfolios or operating complex businesses. These governments have no institutions, no infrastructure, no skilled public servants versed in complex technical matters critical for success. And typically, no safeguards or mechanisms shield those responsible for managing the assets from intense political pressures. The unique experiences of a number of sovereign funds in emerging-market economies can be helpful and informative in these situations. This is not to say that they have all the answers or that all of their experiences have been positive. The important point is that all of them—albeit to varying degrees—have strived to set up professional fund-management operations at arm’s length from the government, based on commercial principles, and staffed with experienced market practitioners whose compensation is benchmarked to the private sector.

The most experienced and longest standing among these entities is Temasek Holdings of Singapore. Established in 1974, it spent its first 25 years focusing primarily on managing domestic assets and nurturing portfolio companies in the city-state. Only since the turn of the century has it focused increasingly on Asia and the broader world, to a point where only one-third of its investments are now in the domestic economy. During the 35 years of its existence, Temasek has achieved solid investment returns, often on par with or better than most of the private-sector peers against which it gauges its performance. But the significance of the Temasek model goes beyond just attractive returns: by interposing an investment holding company, operating on purely commercial principles, between the state and its investee companies, the government managed to separate its roles as owner and shareholder from those of policymaker and market regulator. This also freed government-owned companies to operate purely as commercial enterprises and focused Temasek’s efforts on the bottom line.18

Over the years, many other sovereign funds have been established in other parts of the developing world along broadly similar lines, striving to achieve broadly similar objectives, thus providing a unique set of experiences and a rich collection of case studies for policymakers in developed countries. In fact, some western countries have already set up entities that could serve as the basis for similar types of sovereign funds (e.g., the Shareholder Executive and the UKFI in the United Kingdom). Even if the eventual objective of these organizations is complete and unambiguous disposal of the acquired shares back into the private sector, in the interim they could do much worse than turn to the likes of Temasek for lessons on organizational structure, governance, asset management, and active ownership.

Will the authorities in developed countries rise to this challenge? Or will the dogma of free-market ideology, which tends to dismiss any form of government participation in the economy, preclude a calm and pragmatic discussion? Perhaps what the world needs is a new version of the Washington Consensus, which would embrace government participation in free markets, but would do so on the basis of a strict set of terms and conditions. While reiterating the key principles of the original Washington Consensus and reconfirming the supremacy of markets, it would at the same time take a much more nuanced and sophisticated view of a government’s participation in the economy.19 Specifically, it would acknowledge that differences in history, social and political traditions, and levels of economic development may legitimately lead to materially different levels and forms of government participation in domestic economies. It would also acknowledge that, in light of the global financial crisis, even in the most laissez-faire of economies, governments from time to time may need to get involved in the domestic economy and financial markets as a principal.

At the same time, the new Washington Consensus20 would lay out a clearly formulated set of standards and practices, not unlike the Santiago Principles, that governments would need to follow to be seen as compliant and up to the standard in their approaches to domestic investments and businesses. These would explicitly include best practices in organizational setup, governance, investment policy, operations, and risk management, among other issues. This approach could assist significantly in reconciling the increased activity of sovereign investors in domestic economies with free-market principles.


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CountryPolicy Actions
FranceIn November 2008, French President Sarkozy announced the establishment of the Strategic Investment Fund as an “anti-crisis weapon.” Capitalized at €20 billion (about US$26 billion), the fund is designed to support domestic small and medium enterprises and strategically important companies during crises, with a view to eventual exit via share disposals during normal times.
IrelandLegislation was passed in March 2009 to enable use of about €7 billion (about US$9.1 billion) from the National Pension Reserve Fund to recapitalize failing domestic banks, under Ministerial direction and outside the fund’s statutory investment policy. On March 31, the fund’s government bond investments were liquidated and accumulated cash balances tapped to finance the €3.5 billion (about US$4.6 billion) purchase of Bank of Ireland preference shares.
KazakhstanAbout US$10 billion was allocated from the National Fund of Kazakhstan to Samruk-Kazyna National Wealth Fund to implement a series of stabilization measures, including purchases of ordinary and preferred shares of domestic banks, acquisition of distressed real assets, and provision of subordinated loans to struggling domestic borrowers. The objective is to substitute market-based external borrowing with longer-term, sovereign-based internal (National Fund and Samruk-Kazyna) and external (China, Russian Federation, United Arab Emirates) sources.
Republic of KoreaLegislation was introduced to allow the Korea Investment Corporation to invest in domestic shares, real estate, and other domestic assets, ostensibly to have it act as a co-investor to “crowd in” and facilitate foreign investment into Korea.
KuwaitThe Kuwait Investment Authority instituted several measures: (1) repatriated part of its foreign assets and deposited them in domestic banks to provide liquidity; (2) set up a dedicated fund investing in the domestic stock market; and (3) bought domestic bank shares to help boost bank capitalization and confidence. An estimated US$4 billion to US$5 billion has been withdrawn by the Kuwait Investment Authority from international capital markets for domestic deployment.
New ZealandGovernment leaned on the New Zealand Superannuation Fund (NZSF) to increase domestic investments, thereby aiding the domestic economy, infrastructure, and capital markets. NZSF is required by law to consider the government’s advice, but must weigh it against the statutory obligation for prudent commercial investment.
QatarQatar’s government has intervened three times since late 2008: (1) asked Qatar Investment Authority to spend US$5.3 billion to acquire 20 percent stakes in each bank listed on the Doha stock exchange; (2) bought nearly the entire domestic equity portfolio of the banking sector; (3) spent up to US$4.1 billion to buy up commercial banks’ property investments.
Russian FederationPrime Minister Putin signed an official ruling to allow the government to invest part of the National Wealth Fund in Russian stocks, bonds, and unit investment funds. Approximately US$6 billion allocated from the fund to Vneshekonombank, a state-owned development bank, for domestic stock and corporate bond investments, with a further approximately US$16 billion earmarked for subordinated loans to domestic banks.
Saudi ArabiaThe Saudi Arabian Monetary Agency is the Saudi central bank and technically not an SWF, but it does manage nonreserve assets and invests in international equity markets. During the crisis, SAMA made US$3 billion deposits in struggling domestic banks. Also, the Public Investment Fund, which operates under the auspices of the Saudi Ministry of Finance and is entirely focused on domestic institutions and markets, is playing an important role in supporting the Saudi economy.
United Arab EmiratesThe United Arab Emirates (UAE) undertook several measures: (1) A.A. al-Ghurair, speaker of the Federal National Council, which advises the rulers, called for spending part of UAE SWF assets to revive the economy; (2) Mubadala is reported to have shifted assets from international to domestic markets, with its domestic portfolio increasing by a factor of more than five from 2007 to 2008; (3) in February 2009, the government of Dubai raised US$20 billion in debt, half of it underwritten by the UAE central bank. The UAE federal government is reportedly planning to issue federal bonds, and market sources suggest Abu Dhabi Investment Authority may be a potential investor.

The roundtable was held under the Chatham House Rule, which states: “When a meeting, or part thereof, is held under the Chatham House Rule, participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.”


Norway dramatically increased the spending of oil revenues to deal with the financial crisis, reducing inflows into the SWF and thus slowing its asset growth considerably: measured by the change in the structural, non-oil deficit, the fiscal stimulus in 2009 can be estimated at 3 percent of trend GDP (for more information on Norway’s fiscal situation and how it relates to the sovereign fund, see Norway, Royal Ministry of Finance, 2010). Chile tapped one of its SWFs directly, spending close to US$4 billion, or 2.8 percent of GDP, from the Economic and Social Stabilization Fund by way of fiscal stimulus in 2009. According to the author’s sources at the Ministry of Finance, subsequent withdrawals brought the total expenditure from the fund to US$9.3 billion.


See the annex to this chapter for specific examples of policy actions in these and other countries during the crisis.


For comprehensive reviews and discussion of reserve adequacy, see Wijnholds and Kapteyn, 2001; Edison, 2003; Aizenman and Lee, 2005; and European Central Bank, 2006.


While this includes cases where home governments act through SWFs and other sovereign funds, potential problems are arguably much broader in scope, given that they may arise from direct government ownership and participation in the domestic economy through partially or fully state-owned enterprises, development banks, and other non-SWF vehicles.


Of this type of fund, only Singapore’s Temasek has been classified as an SWF within the meaning of the Santiago Principles and included in the International Working Group of Sovereign Wealth Funds. It is not clear why other similar funds are excluded from this forum—most notably, Mubadala Development Company of Abu Dhabi, which appears to satisfy all of the definitional criteria of an SWF as set out in the Santiago Principles. Other such funds appear to be excluded solely on the grounds that they invest only in domestic assets, but Temasek was originally established and continued to operate for a long time as a sovereign fund investing exclusively in domestic assets.


In 2008, Norway’s SWF suffered the worst performance in its 12-year investment history, losing 23.3 percent or US$96.3 billion, thus wiping out most of its cumulative investment gains since inception. Singapore’s Temasek reportedly lost 31 percent in the eight months ending November 30, 2008, with the Government of Singapore Investment Company estimated by the Wall Street Journal to have suffered a similar drop in 2008, probably about US$33 billion (Paris, 2009). Some analysts following SWFs in the Gulf Cooperation Council put losses at the largest funds in the range of 18–40 percent (see Setser and Ziemba, 2009, and Reed, 2008).


In 2008, China’s current account surplus declined 27 percent year-on-year, slowing the growth of foreign reserves. The Institute of International Finance forecasted a drop of 33 percent in 2009 in net financial flows to emerging Asia from its peak in 2007 (Institute of International Finance, 2009). The challenges and implications of this are discussed in the interview with Wu Xiaoling (Wang, 2009).


For more on this point, see Park, 2008.


See NBIM, 2002; for Kazakhstan, the information can be found on the central bank’s Web site:


At an international sovereign funds conference in May 2007, a senior representative from a large Gulf Cooperation Council SWF explained that although they were mindful of preexisting commodity exposure via oil in the ground, they took a more granular approach: while avoiding assets in the upstream sector, they had the ability to invest in the downstream sector. Also, nonhydrocarbon commodities—such as metals or agriculture—were viewed as potentially legitimate investments.


For a practitioner’s perspective, see Scherer, 2009; and State Street, 2009. For an academic perspective, see Martellini, 2008.


A commodity endowment may be the single most important national asset, but it is not the only one. Authorities may want to keep in mind the state’s other national assets when determining the optimal asset allocation and investment strategy for their SWF. For example, Abu Dhabi Investment Authority may want to be aware of investments made through other sovereign vehicles, such as Mubadala Development Company, the Abu Dhabi Investment Council, and the International Petroleum Investment Company. Similarly, Singapore’s government may want to jointly optimize and control risk exposures taken through the Government of Singapore Investment Corporation, Temasek, and the Monetary Authority of Singapore.


One possible consequence of the current crisis could be a stronger emphasis by SWFs and their sponsoring governments on strategic or “extra-financial” policy objectives. For more on this point, see State Street, 2009.


For more information on India, see Choudhury, 2008; on Japan, see Rowley, 2008; on Thailand, see Srisukkasem, 2008; and Phuvanatnaranubala, 2008.


The massive expansion of the role of government in the United States and other developed economies resulting from the crisis goes well beyond bailouts or reluctant share ownership. For a broad overview of the issues and challenges, see McKinsey & Company, 2009.


I am grateful to John Nugee of State Street for this insight.


For more information on Temasek Holdings, see Ho, 2004; and Lim and Tsai, 2009; also, see Temasek’s Web site at


The term Washington Consensus was originally coined in 1989 by John Williamson (with the Peterson Institute at the time of writing of this chapter) in the narrow context of specific policy advice to Latin American countries in the late 1980s. Over time it has acquired a much broader meaning, often with a negative connotation, to refer to neoliberal policies and “market fundamentalist” views. For more information on the history of the term, see “Washington Consensus” at


The idea of a new Washington Consensus has been explored before: for example, some commentators have suggested that the policy recommendations contained in the final report of the Commission on Growth and Development, chaired by Nobel Laureate Michael Spence, effectively amount to such a phenomenon. For more details, see Rodrik, 2008.

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