Asset Allocation

The rise of the Sovereign Wealth Fund

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In the three and a half years from 2009 that Scott Kalb oversaw investment strategy at South Korea’s sovereign wealth fund Korea Investment Corporation, assets under management grew from $19 billion to $60 billion. In a reflection of the seemingly unstoppable growth in SWF assets, KIC now manages an estimated $150 billion.

“The growth in SWF AUM is enormous. Part of it is money coming in and part of it is returns,” says Kalb, now chairman of the Washington-based Sovereign Investor Institute at Institutional Investor, and director of the Washington-based Responsible Asset Allocator Initiative at New America.

It’s a growth trajectory that assumes even more resonance given the number of sovereign funds setting up shop. In the past 20 years their number has jumped fivefold from 20 to approximately 100 today, most recently joined by Indonesia, seeking to set up a fund modelled on Singapore’s state investment vehicle $224 billion Temasek Holdings and $39 billion Khazanah Nasional Berhad, the Malaysian equivalent, to support local start-ups and boost economic growth. There is even talk of the EU 27 establishing a fund to finance European industrial champions to compete with US and Chinese tech giants. Kalb estimates SWF assets currently grow at an estimated $400-500 billion a year. If even half the new cohort get going, that would quickly become a drop in the ocean.

SWFs come in all different shapes and sizes and they’re not springing up in every corner of the globe.

“Latin America isn’t paying much attention to these types of vehicles or institutions,” observes Abdiel Santiago, chief executive and CIO at $1.5 billion Fondo de Ahorro de Panamá, guardian and investor of the nation’s shipping revenues from the Panama Canal since 2013. Nevertheless, there are common drivers behind the wave of new funds, and key things to get right.

Sovereign Development Funds

Resource-rich countries’ desire to manage and ring fence surplus revenues remains one explanation behind the rising numbers. Witness Russia’s $124 billion National Wealth Fund, storing away extra revenue on all oil sold at more than $40 a barrel since 2017 to create a rainy-day fund that now accounts for around 7 per cent of GDP.

But SWFs are no longer the preserve of resource-rich countries. In recent years a new cohort of Sovereign Development Funds, SDFs, have arrived on the scene seeking to catalyse investment and growth in their own economies. Today, around 52 SDFs manage approximately $1.6 trillion in assets, says Diego López, managing director, Global Sovereign Wealth Fund Capital in New York.

“In the past five years alone 16 governments from Asia, Africa, Europe, Latin America and Middle East have set up their own SDF, with the most recent cases in Indonesia and South Africa,” he says.

It’s a trend Eugene O’Callaghan, director of Ireland’s €8.7 billion ($10.7 billion) Strategic Investment Fund (ISIF), established in 2014 with a double bottom line to both invest commercially and support economic activity and employment in Ireland, links to the rise in impact investment.

“The increasing realisation that both impact and return are achievable is driving more of these funds,” he says. For many countries it’s also an effort to counter dwindling foreign direct investment, estimated at 20 year lows in emerging markets in recent figures from the Institute of International Finance.

India’s government-seeded National Investment and Infrastructure Fund’s (NIIF) unique model to crowd in infrastructure investment rests on a GP/LP structure whereby anchor LP investors are also NIIF’s majority owners. Global names including $700 billion Abu Dhabi Investment Authority – its first anchor – AustralianSuper, Temasek, Canada’s Ontario Teachers’ Pension Plan and, as of last December, Canada Pension Plan Investment Board, have all signed up as founding LPs.

“We have very credible local and international investors in our funds alongside the Indian government. We are also working with globally respected infrastructure operators,” says Saloni Jhaveri, head of investor relationships at NIIF.

SWFs invest in SDF

NIIF’s model illustrates SWFs enthusiasm to invest in SDFs in a trend that comes as no surprise. Not only is investing with emerging economies increasingly on the radar at SWFs, hunting returns further afield to counter low performance in developed regions. There is also a natural empathy and trust between state actors because they come from “a similar place” that sets them apart from commercial, private sector investors, says Duncan Bonfield, chief executive of the International Forum of Sovereign Wealth Funds, which this year added Spain’s Compania Espanola de Financiacion del Desarrollo, and the Natural Resource Fund of Guyana to its membership of funds from nearly 40 countries.

“SWFs are definitely speaking to new development funds about specific investments and partnerships,” he says, pointing to recent interest from Gulf-based SWFs in new SDFs in South Africa, Ghana, Kenya and Egypt. “Emerging and frontier markets have so much potential but so little is investable,” says Bonfield, who predicts these new funds could steer more investment to emerging markets.

NIIF’s progress shows how. The policy team in its Delhi-headquarters works closely with the Indian government, exploring commercial viability and suitable structures for multiple projects. There is no government pressure to invest if projects aren’t right, with NIIF’s investment team independently deciding if projects are good enough to bid for, says Jhaveri.

“The most important factor in attracting and crowding in co-investment is that SDFs are accepted as commercial investors,” says O’Callaghan. “If they are seen to provide soft money, nobody will invest alongside. They also need to operate at the same pace as the private sector. You don’t want to hold up transactions.”

In another trend the new cohort of SDFs are more transparent than many traditional SWFs.

“SWFs are not compelled to publish their annual reports or disclose their AUM. At the end of the day, SWFs, are only accountable to their boards and shareholders, the Ministry of Finance or Central Bank,” says Lopez. In contrast, SDF’s won’t attract inward investment unless they put transparency centre stage, as NIIF does trading best practice with its LP partners.

If “things come up” the GP is quick to pick up the phone to LP partners, says Jhaveri. “We say this is what we talked about, these are the things that are not working, these are the concerns.”


Key to all new sovereign funds’ success and credibility is governance, ensuring the relationship with government, withdrawal rules and risk appetite is cast into law. Six of the nine directors on ISIF’s controlling National Treasury Management Agency are independent, private sector experts. “If you don’t have that independence, then a sovereign fund risks becoming perceived as a vehicle that could be used by a government for non-commercial investments”, says O’Callaghan.

“Everything starts with governance,” agrees Panama’s Santiago, explaining how at the Central American fund this rests with a seven-member board of directors who set the strategic asset allocation but leave the day-to-day investment decisions to the team.

Panama’s arms-length relationship with the government was recently tested – and strengthened – when the fund shook off pressure to withdraw funds.

“The government did have the power to withdraw funds, but the law was recently changed following pretty intense lobbying, especially by our former chairman, Jose N. Abbo,” he explains. Now the government can’t tap the fund until its AUM hits 5 per cent of GDP – it is currently 2.3 per cent of GDP. “They can’t withdraw any funds until we double in size,” he says.

Private markets

Panama’s growing confidence is also reflected in the fund embarking on a more adventurous investment strategy. In a bid to diversify its plain vanilla portfolio, it is about to invest 5 per cent in private equity, focused on the secondaries market in a marked change from its current global, primarily developed market, public equity and fixed income allocations.

“It [the secondaries market] provides us with a little more visibility and a little more liquidity and we can access potential long-term investment opportunities at costs that are more reasonable,” says Santiago. “We are trying to step into the asset class in a methodical way. It’s not a large amount, but it will help solidify and diversify the portfolio.”

All Panama’s assets are externally managed via three relationships, and Santiago states that the private equity allocation will likely involve a new relationship.

“It’s a bit tough to comment on this at this stage but we are very close to announcing our decision here. I think one of the key factors we will take into consideration is diversification.” He also imagines a future whereby the fund invests in Panama – like a SDF.

“We don’t invest any of our assets in Panama. But could we one day be a catalyst for opportunities in infrastructure and entrepreneurship inside our own country? It is always a possibility,” he says.

SWFs increasing dominance in private markets shows the strides Panama’s first steps could become. Unimpeded by liquidity concerns, deficits or the need to pay pensions, private markets have become a natural home for SWF assets. The $940 billion China Investment Corporation now counts alternatives as 44.1 per cent of its overseas investment portfolio, up from 39.3 per cent in 2017.

It’s a trend Kalb believes is as significant as SWFs rising number, and assets under management.

“Allocations to private market strategies have been going up,” says Kalb. “As a group, half of them have up to 20 per cent in private markets and a quarter of them have up to 40 per cent in private markets. Ten years from now, half will have up to 30 per cent in private markets and a quarter will have up to 50 per cent of their assets in private markets. The numbers just keep going up.”

An IFSWF report last year details the private market allocations of SWFs including a specific analysis of venture capital investments and the sectors favoured by these investors, which include private technology and healthcare companies.

It has ratcheted up the competition for private assets, forcing public pension funds to fine tune their investment processes. Like California’s $252.4 billion CalSTRS, currently putting in place a new model for investment that will allow the fund to partner with GPs to identify higher-return, lower-cost strategies and respond more quickly to investment opportunities. For private equity particularly, “this will increase the speed of decision-making, expand co-investment reach and improve CalSTRS’ desirability as a co-investment partner,” says a spokesperson at the fund.

Human capital

New sovereign funds are also boosting their domestic investment sectors. Not all SWFs hire investment teams and in-source. The core investment function of Panama’s small team is strategic asset allocation where it works with partners like the World Bank in a relationship that allowed the fund to “get smart, fast” on the fundamentals of asset allocation, says Santiago. Building out the tiny team will now depend on whether the mandates change and require a new skills set, he says. Elsewhere, López points to statistics revealing how SWFs (including SDFs) have increasingly set up offices overseas.

“When we analysed human capital and the international footprint of SWFs back in 2015, there were 70 representative offices overseas. Today, there are 142. It’s easier to recruit top talent in these geographies,” he says.

Some of the SWFs are big organisations, Norges Bank Investment Management for example employees 540 employees from 38 countries and has offices in Oslo, London, New York, Shanghai and Singapore.

Yet India’s NIIF illustrates a parallel in-sourcing trend. It has built a 55-strong team where the focus has recently evolved to building out operational and technical skills as well as ESG. NIIF is also playing an important role seeding local managers. For example, its fund of funds (it also has a master fund and a strategic opportunities fund, all focused on core infrastructure and related sectors) allocates to India’s top quartile fund managers. Mandates are “meaningful” and extend, in some cases, to substantial anchor investment for those funds, explains Jhaveri, who moved home from the US to become one of NIIF’s first members of staff.

“Nigeria’s Sovereign Investment Authority is a good example of a SWF drawing on their Diaspora. It’s managed to attract investment professionals back home to create a real strength and quality in the investment team,” says Bonfield, who notes that when in-house staff inevitably move on, they often establish their own businesses in their home country.

Indeed, such is SWFs emphasis on home-grown talent today, Kalb believes his experience as a foreigner leading at a SWF where he oversaw KIC’s 75-member team and testified to Parliament, is now increasingly rare.

“SWFs will always hire foreign talent, but it is unlikely we will see many of those foreign professionals in a position where they are actually running the show,” he concludes.

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