In some ways, SWFs exist as “a means of taming markets by using markets,” according to the paper.
The number and total assets of sovereign wealth funds are set to grow at a much faster pace than the assets of pension funds and endowments, sources said. Some nations already are launching a second or third “special purpose” investment agency with varying investment targets. For example, earlier this year, Temasek Holdings Pte. Ltd., Singapore's sovereign wealth fund, established Seatown Holdings Pte. Ltd., a subsidiary “geared toward institutional investments in riskier assets,” said Mr. Monk, research fellow in Oxford University's School of Geography and the Environment, Oxford, England.
“They can be more dynamic and responsive to markets” compared with other institutional investors, Mr. Monk said.
Cynthia Sweeney Barnes, London-based global head of sovereigns and supranationals at HSBC Global Asset Management Ltd., added that many SWFs “have a permanence of capital, which drives investing behavior. … They can afford a greater degree of patience in pursuit of enhanced returns.”
Preqin, a London-based alternative investment research firm, estimates SWFs together had an estimated $3.8 trillion in assets at the year-end 2009, or a 22% increase from two years earlier. Other sources have put the figure higher — approaching $5 trillion — partly because of how sovereign wealth funds are defined.
In general, they are government-owned investment funds whose assets come from commodities-based or trading-related excess reserves. They can include sovereign pension funds, such as Ireland's $30.6 billion National Pensions Reserve Fund, Dublin, and the investment arms of central banks, including SAFE Investment Co. Ltd., Beijing. SAFE was set up by China's central bank in 1997 to help diversify excess reserves that now total about $2.4 trillion, and it manages an estimated $347 billion, according to the Sovereign Wealth Fund Institute Inc.
Wayne Bowers, London-based CEO of Northern Trust Global Investments for the Europe, Middle East and Africa region and Asia-Pacific, said each SWF is designed for “the long-term stability of that country.”
“What we've seen is a number of stages of growth and development,” Mr. Bowers said. “It's normal and natural as countries in the emerging world develop, (officials) begin to very seriously manage reserves, and then they start to look at providing a certain level of a social safety net, not just in pensions but also health care. This has been the basis to formulating and funding national social security schemes.”