Sovereign Wealth Funds: Whats Their Story?

Most investments are believed to have their roots in some basic fundamental concept and governed by certain rules or principles। This tends to standardize their classification and quantify their risk, correspondingly linking their actions to it. But there is a class of investments for whom the best rule in the book is to follow no rules at all. These are sovereign wealth funds.

A sovereign wealth fund or SWF as it is commonly known, is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. What makes them different is that they don’t adhere to the basic fundamentals of investment and don’t try to match current outflows with future cash flows or vice-versa. They have a very high risk appetite, have almost no clarity of objective and have very little transparency.
In a way, the fact that they have an infinite risk appetite and perpetuity as the time horizon for an investment, gives them an awful lot of time to ride bull cycles and then cool off। This also gives them ample time to correct their mistakes and identify the ones the others have made. They see many investment cycles being born and die during the course of their existence. An example of this is The Government Pension Fund of Norway.

Norway's Government Pension Fund and New Zealand's Superannuation Fund were rated as the best managed sovereign funds, while Abu Dhabi's management counts among the worst in terms of transparency and accountability। Norway and Abu Dhabi are investing a portion of their swelling oil wealth, while New Zealand is socking away tax receipts to provide retirement income for its citizens.

The International Monetary Fund estimates that sovereign wealth funds control about $3 trillion and that figure could grow to $12 trillion by 2012. The biggest of them, the Abu Dhabi Investment Authority and Council, is believed to sit on about $875 billion.
The bottom line at the end of the day is that a government's financial priority may override the standard rulebook, especially when returns are in double digits. I personally think that sovereign wealth fund escape the panic radar because of the time they have to correct mistakes and an investment approach which can’t be predicted.
Probably at times, the best plan to have is to have none at all.