Sovereign Wealth Funds: How do they work and how does Australia’s stack up?

Nick Sundich Nick Sundich, September 26, 2023

In this article, we look at Sovereign Wealth Funds. They are worth knowing about because they have a bigger role in equity markets than you think – they’re not just ‘saving for a rainy day’.

 

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What are sovereign wealth funds?

A sovereign wealth fund (SWF) is a state-owned investment fund that is managed and invested by the government on behalf of its citizens. SWFs are set up with funds generated from various sources, including taxes, trade surpluses, contracts for natural resources extraction, or proceeds from asset sales. The money in SWFs are then invested into a variety of assets, such as stocks, bonds, and real estate. The main purpose of SWFs is to help governments invest in their economies and secure their financial stability.

How do they Work?

SWFs are typically managed by government agencies or investment professionals who have the responsibility to make decisions about how to invest the funds. Generally, these funds are used to diversify and stabilise the national economy by investing money into assets that can produce a steady return over time. SWFs may also invest in private companies or venture capital projects, in order to encourage economic growth and job creation.

In most cases, SWFs are managed within strict guidelines that dictate how much of the fund can be invested in certain types of assets, and how the returns from these investments should be used. For example, some funds may require that the returns from their investments be reinvested back into the fund or used to pay for public services like healthcare.

Meet Australia’s sovereign wealth fund

Australia’s sovereign wealth fund is the Future Fund. Established in 2006, it is Australia’s long-term savings vehicle for funding major initiatives and liabilities. It is overseen by an independent Board of Guardians who are responsible for investing and managing the Fund to meet its objectives.

The Fund was initially capitalised with AUD$60 billion drawn from Australia’s Future Taxation revenue and now has $256.2bn in funds under management. $206.1bn of these assets are invested into a wide range of asset classes – as outlined below.

Source: Future Fund

 

The remaining ~$50bn is invested into funds for individual needs – for instance $21.9bn is in a Medical Research Future Fund and $4.4bn is in a Disaster Ready Fund. In the 12 months to June 30 2023, it delivered a 6% annual return and has delivered 8.8% p.a. over 10 years. This was up from a negative 1.2% return in the year before.

Norge’s Bank

One other sovereign wealth fund that ASX investors should know about is Norges Bank (the fund of Norway), because it invests in Australian companies from time to time. Many investors don’t follow substantial holder movements that closely but 2019 was an exemption. The Norwegian Parliament passed a tightened set of ethical investment rules and it had to divest its holdings in major ASX resources and energy stocks including BHP and Oil Search.

It still holds stocks in the ASX from time to time. One of its more recent moves was becoming a substantial shareholder in tech company IRESS (ASX:IRE).

 

The bottom line

Overall, SWFs are an important tool for governments to manage and invest their financial resources and help ensure a stable economic future for their citizens. And Australia’s own Future Fund is no different.

 

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