The Rise of Sovereign Wealth Funds
Relatively new, but increasingly important, players on the global investment scene are the Sovereign Wealth Funds. These government-controlled investment vehicles vary considerably in size and scope, as well as by their particular investment strategies and policies, but they are a formidable force in the markets and their reach can be felt in all corners of the world, including Alaska.
The capital for these funds typically originates from excess foreign currency reserves earned from exports or from income derived from commodities such as oil and gas. China’s sovereign wealth fund would be an example of the former, while Norway’s fund would be an example of the latter. By and large, Asian funds arose from export earnings, while Middle Eastern, European, and American funds arose from commodity earnings. Most of these funds invest globally. Some funds dedicate a certain percentage of their fund portfolio for investment in their own countries.
Current estimates value the holdings of the sovereign funds at close to $6 trillion. These holdings encompass a wide variety of financial assets such as stocks, bonds, real estate, precious metals, and other investable instruments. The number of sovereign funds, and their assets under management, have increased dramatically in recent years. According the Sovereign Wealth Fund Institute, since 2005, thirty-two new funds have been established, and between 2008 and 2012, the assets of sovereign wealth funds increased by 59 percent. Two-thirds of these funds have come into existence since 2000, making them a relatively new player in global financial markets.
Alaska is home to the largest sovereign fund in the United States. With assets of some $46 billion, the Alaska Permanent Fund ranks 22nd among the world’s funds. By comparison, Norway’s Government Pension Fund Global, like Alaska, a beneficiary of oil revenues, is the world’s largest fund at $732 billion in assets. The Norwegian fund has holdings in 7,500 foreign companies. In Europe alone, it has a more than a 2 percent average stake in all publically-listed companies. It targets a 4 percent annual rate of return on its investments.
In addition to Norway, other countries with very large funds include Saudi Arabia, United Arab Emirates, China, Singapore, and Russia.
Differing Investment Policies
Investment policies governing the funds differ significantly. Some seek only to obtain a reasonable annual return by managing to outperform the index of the asset classes invested in, while others seek to attain “strategic” objectives to benefit their country. For example, a fund from a country that is energy poor might invest in companies, regions, and projects that are involved with energy production. A fund in a jurisdiction that is seeking to attract a particular industry to its shores may make investments in companies engaged in that industry, or in the infrastructure to make their country more enticing to that industry. Some funds, of course, seek to attain both objectives.
The investment horizon for the funds varies according to the fund’s goals and policies. For example, in 2011, China Investment Corporation (CIC), China’s primary sovereign wealth fund, decided to extend investment horizons from five years to ten years. Creating a longer term portfolio allows CIC to participate in non-public investment vehicles, such as direct investments, hedge funds, private equity and real estate. Over time, the fund, which at the outset invested significantly in the US financial sector, has moved into other sectors including energy, natural resources, and infrastructure projects.
The Alaska Permanent Fund has a stated investment goal of producing a 5 percent real rate of return over the long term. As the fund is designed to benefit both current and future generations, the investment time horizon is long term: ten years or more. The fund invests in a variety of asset classes including stocks, bonds, real estate, private equity, hedge funds, and infrastructure investments. It has holdings in more than three thousand companies around the world. Uniquely, the fund has paid a cash dividend from its earnings to each eligible Alaskan citizen since 1982.
As a number of sovereign wealth funds invest in the natural resources sector, through both stock holdings of the major companies in this space, as well as through direct investments in projects and related infrastructure, it would not come as a surprise for one or more of them to participate in Alaska development projects.
Indirectly, there are already examples of this occurring: In 2009, during the financial crisis, Vancouver-based Teck Resources Limited, the operator of the Red Dog Mine in northwest Alaska outside of Kotzebue, announced that it had sold a 17.5 percent interest in their company to China’s sovereign wealth fund, China Investment Corporation, for $1.5 billion. The transaction was described as a long-term, passive portfolio investment for CIC.
Teck President and CEO Don Lindsay said in the announcement, “This transaction will have an immediate and very positive impact on Teck’s balance sheet and represents an attractive opportunity for Teck to establish a relationship with a major Chinese financial investor, with a deep understanding of China, the world’s largest consumer of our principal products.”
Alaska’s Red Dog Mine is one of the world’s largest zinc producers. China is the world’s largest consumers of zinc, accounting for nearly 35 percent of global zinc consumption.
A more recent instance was also in the mining sector and also involved the Chinese. In June 2010, Coeur d’Alene Mines Corporation of Idaho, and its Alaska subsidiary, Coeur Alaska, Inc., announced a landmark agreement for a Chinese company to purchase and process gold concentrates produced at the new Kensington Mine, operated by Coeur Alaska and located outside of Juneau. China National Gold Corporation agreed to purchase approximately half of the gold concentrates produced at Kensington.
According to Coeur, the agreement reached was the first of its kind between a state-owned enterprise of the People’s Republic of China and a US precious metals mine. President and CEO of Coeur Dennis Wheeler stated, “We are delighted to enter into this major relationship with China National Gold. This represents a groundbreaking level of business relations between the two companies as this new, major gold mine begins the initial stage of its long production life.”
China National Gold, a state-owned enterprise headquartered in Beijing, is China’s largest gold producer and operates nearly sixty mines throughout China. In addition to operating mines, the company also owns and operates a number of smelters and refineries.
Many consider state-owned enterprises, such as China National Gold, to be something akin to cousins of sovereign wealth funds in that they, too, make investments on behalf of their country. Indeed, a number of sovereign wealth funds were established, at least initially, to invest in state-owned enterprises. China Investment Corporation and Singapore’s Temasek Holdings are examples, though both have since expanded their scope to include significant investments outside of their respective countries.
As the number of sovereign wealth funds grows, and their assets under management continue to build, their presence in world markets will become increasingly significant. Alaska, with its abundance of natural resources so much in demand by both developed and emerging economies, is an attractive destination for investment by the these funds. Many Alaska projects, to be economically viable, need to be large-scale in scope. This implies correspondingly large-scale investments. Sovereign wealth funds, and their state-owned enterprise cousins, could be ideal partners to enable these projects to happen.
Greg Wolf is the Executive Director of World Trade Center Alaska (wtcak.org). Contact him by phone (907-278-7234) or email (firstname.lastname@example.org). World Trade Center Alaska has been serving Alaska’s business community since 1987.
Posted: November 1, 2013