International Trade Special Section | Sovereign Wealth
Large Funds with a Long View
Sovereign wealth funds are significant investors globally
By Greg Wolf

tate-sponsored investment funds, better known as sovereign wealth funds, continue to rise in economic clout as their assets under management continues to grow and they deploy funds into a broader range of investments. While these government-controlled investment vehicles vary considerably in size and scope, as well as by their particular investment strategies and policies, they are a significant force in the financial markets and their impact can be felt in all corners of the world, including Alaska.

Typically, the source of the capital for these funds originates either from excess foreign currency reserves earned through exports or from income derived from commodity sales such as oil and gas. China’s sovereign funds would be an example of the former, while Norway’s would be an example of the latter. Generally speaking, Asian funds arose from export earnings while Middle Eastern, European, and American funds arose from commodity earnings. Most of these funds invest globally. Some of them dedicate a certain percentage of their portfolio for investment in their own countries.

According to the Sovereign Wealth Fund Institute (SWFI), there are now seventy-one sovereign funds. The value of their holdings is estimated to be $8.1 trillion as of December 2018. These holdings encompass a wide variety of financial assets including stocks, bonds, real estate, precious metals, and other investable assets. They also include so-called “alternative investments” managed by hedge funds, private equity and venture capital funds. Analysts at the SWFI, who track these funds, expect the value of the funds to hit $10 trillion by 2020. That growth projection is based, however, in large part, on anticipated higher oil prices, which may or not occur consistent with this timeline.

While Alaska was not the first American state to establish a sovereign wealth fund—that distinction belongs to Texas—it is home to the largest fund in the United States. With assets of approximately $65 billion, the Alaska Permanent Fund currently ranks 19th among the world’s funds, ranking just below Libya ($66 billion) and just above Kazakhstan ($60 billion). By contrast, at just over $1 trillion, Norway’s Government Pension Fund Global is the world’s largest fund. In addition to Norway, other countries with very large funds include China, the United Arab Emirates, Kuwait, Saudi Arabia, Hong Kong, and Singapore. One of China’s sovereign funds is approaching the $1 trillion mark, as well. China Investment Corporation (CIC) currently is the world’s second largest fund at $941 billion.

As noted, Alaska has America’s largest single fund at just over $65 billion. Texas has two sizable funds—the Texas Permanent School Fund ($37 billion) and the Permanent University Fund ($17 billion). Taken together, Texas has approximately $54 billion is sovereign assets. The Texas funds date back to the 1800s.

Other American states that have established a sovereign fund include Wyoming, New Mexico, North Dakota, Montana, Louisiana, Alabama, Utah, Idaho, and (most recently in 2014) West Virginia.

The Alaska Permanent Fund is unique among all sovereign funds with its annual cash dividends paid out to each eligible citizen from the fund earnings. Since the fund was established in 1976, some $25 billion has been distributed in the form of dividend payments to its citizens.

Investment policies governing the sovereign funds vary considerably. Most, of course, seek to achieve a reasonable rate of return consistent with a commensurate rate of risk. Typically, they measure the success or failure of their strategy against an index of the particular asset class invested in. Others seek not only this but also to attain “strategic objectives” to benefit their country. For example, a country that is energy poor might choose to invest in companies, regions, or projects that are involved with energy production.

Some countries are more aggressive than others in terms of the types of investments they are willing to make in order to achieve a particular goal. A good example is Singapore and one of its funds, Temasek Holdings. This fund was established in 1974 and currently has assets of $375 billion under management. In pursuing economic development objectives, Singapore has a history of being proactive in their attainment. A recent example is Pavilion Energy. Already a major player in oil storage, refining, distribution, and trading, Singapore is now seeking to do the same with the Asian LNG (liquid natural gas) market.

To accomplish this, the Singapore government, through Temasek, established Pavilion Energy. The company, launched in 2013, aims to help Singapore become an important player in Asia’s growing LNG market. It will do so through investments in key LNG assets and related LNG businesses. The company is 100 percent owned by Temasek. The company will make investments in upstream assets and, through its subsidiary Pavilion Gas, will manage downstream gas operations in Singapore. Pavilion will be involved with storage, distribution, and trading of LNG in the Asia region. Singapore created a new company, through an investment by one of its sovereign wealth funds, to help achieve a national goal.

The investment horizon for the funds varies according to each fund’s goals and policies. Several years ago, for example, CIC moved to extend investment horizons from five to ten years. Creating a longer-term portfolio allows the fund to participate in non-public investment vehicles including direct investments, hedge funds, private equity, and real estate. Over time, this fund, which at its beginning invested significantly in the US financial sector, has moved into other sectors such as energy, natural resources, and infrastructure.

CIC, established in 2007, today is China’s largest sovereign fund, managing $941 billion in assets, and already has Alaska on its radar, both directly and indirectly. In November 2017, during President Trump’s visit to Beijing to meet with Chinese President Xi Jinping, a joint development agreement was signed between the Alaska Gasline Development Corporation, the State of Alaska, China Petroleum Corporation (Sinopec), the Bank of China, and CIC to advance the Alaska LNG project. That agreement was re-affirmed in late 2018 with all parties agreeing to continue negotiations.

China, which today is the world’s third largest market for LNG and is widely expected to be the largest in the not too distant future, is a natural partner for Alaska given China’s enormous appetite for natural resources and the state’s world-class reserves of these commodities.

CIC already has a foothold in Alaska: in 2009, Vancouver-based Teck Resources, the operator of the Red Dog Mine, announced it had sold a 17.5 percent interest in their company to CIC for $1.5 billion. The transaction was described as a long-term, passive portfolio investment for the fund.

In September 2017, CIC reduced its holding in Teck to approximately 10 percent. Teck President and CEO Don Lindsay commented, “Prior to their purchase of our shares in July 2009, CIC told us they intended to be a long-term partner focused on financial returns. They have fully lived up to that commitment and, in addition, have been helpful in building important relationship with customers and others in China. We understand CIC’s reasons for monetizing a portion of its shareholding and are pleased that CIC intends to remain a significant financial investor in Teck.”

Looking ahead, as the number of sovereign wealth funds grow and their assets under management continue to expand, their presence will increasingly be felt around the world. Alaska, with its abundance of natural resources so much in demand by both developed and emerging economies, is an attractive destination for investments by these funds. It’s a win-win combination as many Alaska projects need to be large scale in scope to be economically viable. In turn, these projects require correspondingly large scale funding by investors, such as the sovereign wealth funds, with long-term time horizons.

In addition, as Alaska positions itself as a focal point of Arctic trade, commerce, and investment, the sovereign funds may find benefit in participating with Alaska-based investment vehicles in order to give them exposure to investable opportunities in the Arctic region.

Sovereign wealth funds, and their state-owned enterprise cousins, could be ideal partners as Alaska seeks to grow its natural resource economy and its role in Arctic development.