Do countries need sovereign wealth funds?

It’s not a prerequisite but sovereign wealth funds (SWFs) can provide several benefits.

29 May 2019

Benno Klingenberg-Timm spoke with Asian Investor about the benefits of setting up SWFs to invest foreign exchange reserves.

It is not necessarily a prerequisite but the experience of Singapore or China shows that the “diversification for foreign reserves becomes more efficient and the return on accumulated wealth is higher.”

Benno Klingenberg-Timm
Head of APAC sovereign clients

What are the benefits of SWFs?

Benno lists 3 benefits of establishing SWFs:

  1. Attract talent and skills at competitive market rates – this can help SWFs invest more effectively;
  2. Act as a “centre of excellence” that could potentially benefit the country through the transfer of knowledge around global capital markets and financial expertise; and
  3. Provide potentially higher return due to a wider investment universe

Assessing the performance of SWF

Benno says that recently well-established SWFs have assessed their performance again a “reference portfolio”. This is a simple benchmark which comprises listed equity and fixed income only – usually 70% equity and 30% fixed income.

The SWF needs to beat the reference portfolio by diversifying “across a wide range of asset classes including alternative asset classes and active management.”

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