The Meaning, History and Difference of Swf Funds From Other Funds - Research Paper Example

INTRODUCTION

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In the current investment, SWF has emerged to be a major institutional investment in the market across the world. The countries which fall within the GCC has embraced the type of investments include Saudi Arabia, Qatar, Kuwait, Bahrain, United Arabs Emirates and Oman. By 2014, the funds did grow to 7 billion coming second after the insurance, pension and mutual funds (Skancke, et.al, 2013). In the year 2016, the GCC and China sovereign wealth funds were ranked one of the top ten assets among the 70 SWF across the world. Currently, there is no universal meaning or definition of Sovereign Wealth funds. However, various scholars have argued that they are state owned investment vehicles that invest globally in various assets which are determined to range from the real to financial to alternative assets. They are usually funded by the revenues from commodity exports and the transfer of assets from the official foreign exchange reserves (Skancke, et.al, 2013).

Besides, in some circumstances, the government budget surpluses are also transferred into the SWF funds. The main reason as to why the system is developed is to establish and stabilize the government and export revenues, enhance the management of the foreign reserves and accumulation of savings for the future generation in the countries which have been in the resource-rich areas. However, when the groups of Sovereign Wealth Funds are taken into account, then they are referred to as the purpose investment funds which are under the ownership of the government(International Working Group of Sovereign Wealth Funds, 2008).

The Gulf Cooperation Council countries have been facing a significant wave of financial crisis. In this regard, they are left with the option of making changes in their own financial and economic structures if they have to survive in the long-run. Recurrent period of relatively low price levels for natural gases and oil have been predicted to poses serious negative effects on the entire stability of regional economies as well. Following a period of high price levels in the past, the generation of large amounts of revenues towards the Sovereign Wealth Funds has resulted into excessive supplies into the market. To date, the Gross Domestic change in the region has been positive and promising, while the inflation level remains under the economies control. The overall growth in the GDP level of the GCC as per the IMF statistical inference is however estimated at a decline to approximately 2.7 percent in 2016 relative to 3.2 percent level in 2015 as well as 3.4 percent level as at 2014.

Given that these types of funds are created for the micro and macroeconomic purposes, they are mainly used to hold, manage and administer financial assets and other assets to achieve the financial objectives and adopting the strategies of investment of foreign financial assets. The Sovereign Wealth Funds are mainly established out of the proceeds from privatisations, the balance of payment, official foreign currency operations, fiscal surpluses and the receipts from the commodity exports. However, the definition presented mainly excludes the foreign currency reserves which are held by the monetary authorities held for the monetary purposes, government-employee pension funds, an asset which is managed for the benefits of individuals and inter alia.

In the event of running the sovereign Wealth Fund as a part of national investments, there are various risks which might accrue from the operations. They comprise of operational and financial risks. The main process which can be used to mitigate these risks is through engagement and development of risks management processes. These processes include development of risks policies and procedures, risk identification, risks monitoring, risks reporting and risks verification and audit (Skancke, et.al, 2013).These thus make sure that the entire management of the funds is efficient and effective. These enables proper governance, transparency and proper control of the funds hence high returns.

In this particular thesis, the researcher deems to explain and clarify the governance, objectives, transparencies and investment strategies of the GCC Sovereign Wealth Funds. The literature review is provided to recognize and appreciate what others have done in the recent past studies. Besides, the research methodologies are provided to analyze the methods in which the researcher has collected data and how the analysis is to be done. Therefore, data is presented so as to ensure that the entire research question is answered to ensure that the whole system meets the set objectives.

The reports provided by the Indosuez Wealth Management and the IMF have however indicated that there is a possible decline in the growth of regional economy as a result of inadequate structural reforms and oil price levels. The financial landscape of the region has also changed drastically thus, indicating danger for the entire rentier-state regions. The government budgets of the region are mainly anchored on a single product, an aspect that has endangered the economic stability whenever the product is subject to external adversities. Within the global market place as well, there has been serious changes in the market prices as well as the supply chain of the oil and related products (Cohen, 2009). Subsequently, this aspect has posed a significant threat to the stability of the GCC economy which is pivotally dependent on the commodity in its lifelong existence.

1.1. Research Question

What are the meaning, history and difference of SWF funds from other funds?

What is the governance, objectives and transparency and investment strategies of the SWF funds in the financial and capital market?

1.2. Research Objectives

To determine the meaning, history and difference of SWF funds from other funds.

To examine and explain the governance, objectives and transparency and investment strategies of the SWF funds in the financial and capital market?

1.3. Purpose of the StudyThe main purpose of this study is to determine the history, meaning and explore the difference of this fund with other types of funds. Besides, it aims at investigating the objectives of the funds, its governance, transparency and investment strategies which the funds use to fit in the financial market amicably to create wealth.

CHAPTER 2

LITERATURE REVIEW

2.1. Introduction

The worldwide rise of the sovereign wealth fund is a symbol of the ongoing transformation of the world's national economic prospects. It plays a role of mapping the global footprints of the financial institutions and examines the investment management, their governance and the issues of international and domestic legitimacy (International Working Group of Sovereign Wealth Funds, 2008). In varieties of case studies, it has been evident that the adoption and development of the sovereign wealth fund do varies from country to country and the investment institutions have identifiable commodities that match the western financial markets (International Working Group of Sovereign Wealth Funds, 2008). The legitimacy of the fund mainly depends on the degree to which its government and design meet the expectation of the western culture.

2.2. History and meaning of the Sovereign Wealth FundsThe prime SWF was developed in line with first oil strikes of the Persian Gulf States in around 1950s. For instance, the Investment Board of Kuwait stated at around 1953 to manage excess oil revenues that the country was anticipating in the future. Subsequently, this was followed closely by a wave of two independent funds that was developed during the 1970s oil boom. The oil exporters including the Saudi Arabia, United Arab Emirates and the Alberta had been using the SWFs as a mechanism of absorbing extra liquidity which had the potential to overheat the countries economies. Recently, there was another oil and natural gas resource that developed together with the massive build up of external exchange reserves relative to the non-commodity exporters that spurred new set of countries or economies to develop their own SWF (Fortescue, et al. 2010). Such countries included South Korea, Venezuela, Algeria and Iran that were more economically and geographically diverse compared to their ancient counterparts.

Majority of the new funds however represents economies that are hardly commodity exporters and which are not mandatorily faced with the challenge of excessive financial liquidity. Besides, the economies in the latter category are largely underdeveloped relative to the previous set of countries that were characterized with overabundance among the formers of SWFs. In the past decade, the size and scope of SWF has been subject to intense dynamics. However, the SWFs are not a recent phenomenon but have almost doubled by magnitudes since 2000 from about $1.5 to $3 trillion. Based on their current growth rate, they are more likely to exceed the aggregate foreign exchange reserves holding by total magnitude in the next one decade.

The countries that boast of the presence of SWFs have increased in recent accounts courtesy of the international trade and the influence of open economic system. Sovereign Wealth Funds attracts an approximate of $3.19 trillion while the highest performing five SWF accounts for more than 90 percent of the aggregate holdings. Besides, the worlds biggest sovereign wealth fund is the Abu Dhabi Investment Authority which is more than twice the magnitude of its closest counterpart. The wealth funds also accounts for about 27 percent of the aggregate sovereign wealth find asset. Besides, the Taiwan, Nigeria, Chile, East Timor, Papua New Guinea and Azerbaijan holds 10 percent of the remnant fund assets and a fund size between $200 million and $4billion. In Future, Bolivia and Japan also seeks to join the community of Sovereign Wealth Funds via the establishment of individual sovereign wealth funds (York & Zhan, et al. 2009). This scenario is a clear indication of the fast growing SWFs across multiple economies and a sign of the positive influence of the fund system on the countrys economies worldwide.

In the financial and capital market, there is no universally accepted definition of the sovereign wealth fund. However, most authors and observers agree that they are government managed investments vehicles that use the countrys savings to acquire the international costs without incurring the explicit short-term obligations (Chhaochharia & Laeven,2008). The type of funds cannot be considered to be the current innovations since it is an innovation which can be backdated to 1950s when it was developed and adopted by several countries. For example, the first such modern entities are the Kuwait investment authority which was invented in 1953 primary from the oil revenues (International Working Group of Sovereign Wealth Funds, 2008). Three years later, the British administration of the Gilbert Islands created the sovereign wealth funds from the revenues accrued from the phosphate exports.

Afterwards, several SWF funds were created in the 1970s and 1980s.These includes Abu Dhabi and Singapore in 1970, the Brunei, the second one in Singapore and Oman in 1980 and Botswana, Norway, Malaysia and Hong Kong in the early 1990s.From the 1990s, the governments increasingly increased the number of the funds remarkably which made the financial analysts consider Sovereign wealth funds to be a fashion in the financial market (Chhaochharia & Laeven, 2008). In 2000, dozen of the funds have been created and in 2008, they had risen to over 40 types of funds. The SWF funds have become the very essential type of investments in the financial market, and it had been evaluated to have been having an asset estimate of $5 trillion in July 2012.

These types of funds vary depending on various features and character...