Financial Crisis, SWF Investing, and Implications for Financial Stability
| Published date | 01 May 2012 |
| DOI | http://doi.org/10.1111/j.1758-5899.2011.00151.x |
| Date | 01 May 2012 |
Financial Crisis, SWF Investing, and
Implications for Financial Stability
Joonkyu Park
International Monetary Fund
Han van der Hoorn
International Monetary Fund
Abstract
The recent global financial crisis has significantly affected sovereign wealth funds’ (SWFs’) financial performance and
their investment activities. The crisis shed a new light on SWFs’ objectives and priorities. SWFs need to review critically
their strategic asset allocation (SAA) within a sovereign asset and liability management (ALM) framework, and their
assets should be analyzed over complete economic cycles including market turbulences. The crisis raises also the
question of whether some of the underlying objectives of the Santiago Principles—maintaining a stable global
financial system and maximizing financial returns—are perhaps conflicting. We argue that any conflict was from a
wrong interpretation of the principles, not from the principles themselves. Ultimately, stable financial markets are in
each SWF’s self interest, also from a narrow financial perspective. In this respect, financial stability and financial
risk ⁄return can be mutually reinforcing objectives rather than conflicting.
Sovereign wealth funds (SWFs) quoted in this article
Australia Future Fund
Azerbaijan State Oil Fund of the Republic
of Azerbaijan
Canada Alberta Heritage Savings Trust Fund
Chile Economic and Social Stabilization
Fund
China China Investment Corporation
Ireland National Pensions Reserve Fund
Korea Korea Investment Corporation
Kuwait Kuwait Investment Authority
Malaysia Khazanah Nasional
New Zealand New Zealand Superannuation
Fund
Norway Government Pension Fund Global
Qatar Qatar Investment Authority
Russia National Wealth Fund
Singapore Government of Singapore
Investment Corporation
Singapore Temasek Holdings (Private) Limited
Timor-Leste Petroleum Fund of Timor-Leste
Trinidad and
Tobago
Heritage and Stabilization Fund
United Arab
Emirates
Abu Dhabi Investment Authority
United States Alaska Permanent Fund
Sovereign wealth funds (SWFs) play an important role in
modern capital markets as large providers of stable
sources of funding. From a policy perspective, they are
particularly interesting because they combine financial
and macroeconomic objectives. SWFs are created for
macroeconomic purposes, yet hold, manage, or adminis-
ter assets to achieve financial objectives (IWG, 2008).
These dual roles make them unique among large institu-
tional investors.
Broadly speaking, four types of SWFs can be distin-
guished: stabilization funds, savings funds, pension
reserve funds, and reserve investment corporations.
1
Among them, stabilization funds invest mainly in short
duration, liquid fixed income assets that can be
employed at short notice when needed. Ideally the value
of their assets is inversely related with the main source(s)
of fiscal volatility.
The other types—savings funds, pension reserve funds,
and reserve investment corporations—have long-term
objectives, so that one would expect them to take a
through-the-cycle investment approach that is not driven
by short-term volatility. A long investment horizon (see
Table 1) allows these funds to earn risk premia not avail-
able to short-term investors. Norway’s Government Pen-
sion Fund–Global (GPFG), widely regarded as a very
successful SWF, claims that its investment horizon is ‘in
Global Policy Volume 3 . Issue 2 . May 2012
Global Policy (2012) 3:2 doi: 10.1111/j.1758-5899.2011.00151.x ª2012 London School of Economics and Political Science and John Wiley & Sons Ltd.
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