PhD Drozd N. V.
Taras Shevchenko National University of Kyiv, Ukraine
CURRENT ISSUES ON SOVEREIGN WEALTH FUNDS
Despite magnitude of necessary funding for sustainable economic growth, it can be mobilized through prudent public policy and innovative financing mechanisms. However, these flows are not big enough when compared with necessary funds to be mobilized as soon as possible to implement concept of sustainable development under global scale. Necessary resources for this transformation are concentrated through management of long-term investors, especially public financial institutions, development banks, sovereign wealth funds, some pension funds and insurance companies whose obligations are not limited to short-term activities.
Given relevance of research activities of sovereign wealth funds and their cooperation with national economy in terms of increased volatility of global capital flows, many foreign and domestic economists have devoted their work to given area, including I. Akhmadov , S. Boldin , A. Kapelen , J. Lyons, O. Lapko , O. Lyubkina , I. Lytiy , F. Mauro, N. Fernandez, G. Shmarlovska . This issue is widely studied by international financial institutions and their academic departments.
Scientific literature and recent studies on sovereign wealth funds have focused on transparency issues for public accounts and external operations, funds for different purposes and approaches to risk long-term investment horizon, and emphasis on returns instead of liquidity for balance of payments purposes. In particular, there remain questions about potential impact of asset allocation and strategic investment on international capital flows and asset prices.
Organization for Economic Cooperation and Development (OECD) claims that sovereign wealth funds, essentially, are public investment mechanisms, owned by government, and funded in foreign currency assets .
Part of the funds may be invested in national economy. Sovereign wealth fund’s investing involves higher level of profitability compared with state reserves and, consequently, higher risk. Organizational form is available in form of fund or investment corporation .
Rapid accumulation of foreign assets by several countries has led to an increase in number and size of sovereign wealth funds . Guiding objectives of their activities should be as follows:
1) contribute to maintaining stability of global financial system and free flow of capital and investment;
2) comply with all regulatory requirements and disclosure requirements in countries where they invest;
3) investment based on economic and financial risk and profitability considerations;
4) maintain transparency and strong governance structure that provides for adequate operational controls, risk management and accountability .
In order to guarantee implementation of the above principles, it is necessary to provide constructive cooperation with recipient countries for sovereign wealth funds investments. The most important of these are professional investment purposes in accordance with their investment policy.
Robust governance structure that ensures distribution functions of owner, governing body( ies ) and leadership, promote operational independence in management of sovereign wealth funds for investment decisions and investment operations without political influence. Clear investment policy demonstrates commitment of sovereign wealth funds with sequential plan and investment practice. In addition, strong management risk contributes to reliability of investment operations for sovereign wealth funds and their accountability .
They believe that sovereign wealth funds traditionally support only long positions, ie follow strategies of asset purchase storage without opening short positions and may not conduct any transactions with borrowing or direct lending. Obviously, they have long investment time horizons and, like other long-term investors, they are ready to enter market in periods of asset prices falling. It probably has stabilizing effect on global financial system. However, there are some examples of some sovereign funds investing in other funds with high leverage.
Investment strategies of sovereign funds in general do not have high level of transparency. Structure of investments is known only about few funds, for example, State Pension Fund of Norway .
Sovereign funds are newest members of leading international financial market, which has replaced hedge funds and private equity funds. They also replaced central banks as the largest borrowers. According to the IMF forecast, in the next five years, total financial resources of sovereign funds will increase from 2–3 to 6–10 trillion .
Forecasts of funds’ growth suggest that their assets shall reach level of 13 ,4 trillion U.S. dollars in 2017, creating new poles of economic and perhaps political influence. On one hand, it strengthens position of critics about what funds are usually opaque, focused on political and financial returns, working on government orders and do not always meet Western economic and political interests. Therefore, understanding the nature, specificity, investment activities and behavior of sovereign wealth funds, especially under financial crisis is of primary importance.
The list of references:
1. Balding C. A Portfolio Analysis of Sovereign Wealth Funds [ Web resource ] / C. Balding // University of California Working Paper . – June 2008. – Access mode : http://www 2. warwick . ac . uk %2 Ffac %2 Fsoc %2 Feconomics %2 Fnews _ events %2 Fconferences %2 Fwef _ workshop %2 F 19 th _ july %2 Fbalding . pdf
2. Cappelen A. Can Norway Be a Role Model for Natural Resource Abundant Countries? [ Web resource ] / A. Cappelen , L. Mjoset // United Nations University , Research Paper . – No. 2009/23. – Access mode : http :// www . wider . unu . edu / publications / working - papers / research - papers / 2009/ en _ GB / rp 2009-2023/_ files /81295409539514387/ default / RP 81295409539512009-81295409539514323. pdf
3. Lyons G. A growing role for Sovereign Wealth Funds [Web resource] / G. Lyons // Voices on Society. – 2011. – Vol. 3. – Access mode : http://www.voices.mckinseyonsociety.com/ sovereign-wealth-funds/
4. Mauro F. The Brave New World of Sovereign Wealth Funds [Web resource] / F. Mauro // University of Pennsylvania research: 2010. – Access mode : http://www.knowledge.wharton.upenn.edu/papers/download/052810_Lauder_Sovereign_Wealth_Fund_report_2010.pdf
5. What is a SWF ? [ Web resource ]. – Access mode : http :// www . swfinstitute . org / what - is - a - swf