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Sovereign Wealth Funds

Iceland’s new wealth fund is up for grabs for outside managers

Iceland’s Finance Minister Bjarni Benediktsson

An Icelandic wealth fund would have been unthinkable just a decade ago.

But as the nation dismantles the last vestiges of its capital controls, the coalition that steers Iceland has now proposed amassing a fund of as much as 300 billion kronur ($2.5 billion), equal to about $7,000 per Icelander.

It's a testament to Iceland's success — and hard work — in steering its way out of the financial ruin that hit in 2008. Largely out of necessity, politicians unveiled a string of policies that were as controversial as they were successful, including trapping foreign investors, nationalizing banks and writing off consumer debt. The nation was also blessed with a boom in tourism, bringing a rare surplus in its accounts with the rest of the world.

"The upswing of the past years is unique in the history of the country," said Gylfi Zoega, a professor at the University of Iceland and a member of the Icelandic central bank's monetary policy committee. "Usually an upswing has been driven by foreign demand and ended in a currency crisis, but now it's export driven and there has been a lot of domestic savings."

The fund will — on top of Iceland's already sizable currency reserves — provide a buffer to protect the small North Atlantic island against major unforeseen events. To avoid overheating the local economy, it will invest abroad, snapping up stocks, bonds and even private equity.

Iceland's finance minister envisages that the money will be managed by a foreign asset manager, despite entreaties by the central bank that it should be in charge.

"Since all the investments will be abroad, there are endless funds all over the world which would possibly want to bid for that," Finance Minister Bjarni Benediktsson said in an interview this week.

Mr. Benediktsson said that the central bank is occupied with other tasks such monetary policy and financial stability and "doesn't need to be doing asset management for the treasury."

Iceland's central bank, which already oversees a currency reserve of more than 700 billion kronur, disagrees. In an interview, central bank governor Mar Gudmundsson said managing the wealth fund would be in "synergy with other tasks we are performing."

Management issues aside, saving for a rainy day makes sense for Iceland since it sits on a bed of volcanoes. It's also this geological wealth that will help fuel the cash stream going into the fund. The fund will be filled up annually by deposits equal to the income the treasury receives from dividend payments, rents and other revenue from its energy resources.

The initial contributions will primarily come from dividends paid to the state from the National Power Co. of Iceland. Hordur Arnarson, the company's chief executive, said in a recent interview with to national broadcaster RUV that dividends will increase considerably in the coming years and could reach 10 billion to 20 billion kronur a year.

The fund will be restricted from investing in Icelandic securities or financial instruments or issued by parties with legal residence in Iceland. It will be overseen by a five-person board appointed by parliament, the prime minister and the finance minister. The board will decide on who will manage the fund, in a decision expected after parliament clears the project in the spring.