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Sovereign wealth funds expansion: global investments include Alaska assets.

The rise of the world's sovereign wealth funds continues as more funds come into existence and the assets they hold grow as well. While these government-controlled investment vehicles vary considerably 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 from excess foreign currency reserves earned through exports or from income derived from commodities such as oil and gas. China's sovereign funds would be an example of the former, while Norway's would an example of the latter. By and large, Asian funds arose from export earnings while Middle Eastern, European, and American funds arose from commodity earnings. Most of the funds invest globally. Some funds dedicate a certain percentage of their portfolio for investment in their own countries.

$7.4 Trillion Value

According to the Sovereign Wealth Institute, there are now seventy-six sovereign funds. The value of their holdings is estimated to be $7.4 trillion as of June 2016. These holdings encompass a wide variety of financial assets including stocks, bonds, real estate, precious metals, and other investable instruments, They also include so-called "alternative investments" managed by hedge funds, private equity, and venture capital funds.

Of the established funds, 20 percent of them are quite new, coming into existence between 2010 and 2015. The latest wave of entrants into the sovereign wealth arena include a number of funds from African nations, including Senegal, Nigeria, Angola, and Ghana. An American state also is among the new entrants: the West Virginia Future Fund was established in 2014 as a vehicle to invest a portion of the state's oil and gas severance tax revenue.

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 Unites States. With assets of approximately $54 billion, the Alaska Permanent Fund currently ranks 25th among the world's funds, ranking just below Iran ($62 billion) and just above Algeria ($50 billion). By contrast, at $885 billion, Norway's Government Pension Fund Global is the world's largest fund and is widely expected to become the world's first trillion dollar fund.

In addition to Norway, other nations with very large funds include China, Saudi Arabia, United Arab Emirates, Singapore, Kuwait, and Russia.

American Funds

As noted, Alaska has America's largest single fund at $54 billion. However, Texas has two sizable funds--the Texas Permanent School Fund ($37 billion) and the Permanent University Fund ($17 billion). Taken together, the assets of the Texas funds equal that of Alaska. The Texas funds date back to the 1800s. The Permanent School Fund was established in 1854 to benefit primary and secondary schools while the Permanent University Fund was founded in 1876 to provide funding for University of Texas System and the Texas A&M University System.

Other American states who, for various purposes, have established a sovereign fund include Wyoming, New Mexico, North Dakota, Montana, Louisiana, and Alabama.

The Alaska Permanent Fund is unique among all sovereign wealth funds with its annual cash dividends paid to each eligible citizen from fund earnings. Since the fund was established in 1976, more than $24 billion has been distributed in dividend payments to its citizens.

Policy Variations

Investment policies governing the sovereign funds vary considerably. Most, of course, seek to achieve a reasonable rate of return measured against an index of the particular asset class invested in, while others seek not only to accomplish 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. A country that is trying to attract a particular industry to its shores may make investments in companies engaged in that industry or in the infrastructure to make their country more attractive to that industry.

Some countries are more aggressive than others in terms of the types of investments they are willing to make to achieve a particular goal. A good example is Singapore and its fund, Temasek Holdings. This fund was established in 1974 and currently has assets under management totaling $193 billion. 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 (liquefied natural gas) market.

To do so, the Singapore government, through Temasek, established Pavilion Energy. The company, launched in 2013, aims to help Singapore become an important player in Asia's 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. The company will be involved with storage, distribution, and trading of LNG in the Asia region. So, in this case, Singapore created a new company, through an investment by one of its sovereign wealth funds, to help achieve a national goal.

Investment Horizon

The investment horizon for the funds varies according to each fund's goals and policies. Several years ago, for example, China Investment Corporation, one of China's three sovereign wealth funds, moved to extend investment horizons from five to ten years. By creating a longer term portfolio, this 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.

At least one foreign sovereign wealth fund has become involved with Alaska, albeit in an indirect fashion. In 2009, Vancouver-based Teck Resources, the operator of the Red Dog Mine in Northwest Alaska outside of Kotzebue, announced that it had sold a 17.5 percent interest in their company to China Investment Corporation for $1.5 billion. The transaction was described as a long-term, passive portfolio investment for the fund. Red Dog Mine is one of the world's largest zinc producers and China is the world largest zinc consumer.

In another instance of Chinese involvement in Alaska's mining sector, in 2010, China National Gold Corporation, Coeur d'Alene Mines, and its Alaska subsidiary Coeur Alaska Inc. announced a landmark agreement for a state-owned Chinese company to purchase and process gold concentrates from the newly opened Kensington Mine outside of Juneau. The Chinese company agreed to purchase approximately half of the gold concentrates produced at the mine.

While not a sovereign fund, many consider state-owned enterprises, such as China National Gold, to be something akin to cousins of sovereign wealth funds because they, too, make investments on behalf of their countries. Indeed, a number of sovereign wealth funds were established, at least initially, to invest in state-owned enterprises. China Investment Corporation and Temasek Holding are examples, though both have expanded their scope to include significant investments outside of their respective countries.

Alaska Assets

Looking forward, as the number of sovereign wealth funds grows 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. These projects require correspondingly large-scale investments by investors, such as the sovereigns, with long-term horizons.

In addition, as Alaska positions itself as a focal point for Arctic trade, commerce, and investment, the sovereign funds may find benefit in participating in 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.

Greg Wolf has been the Executive Director of the World Trade Center in Anchorage since 2002. Prior to joining the Center, he served as the State of Alaska's Director of International Trade and Market Development and was the Vice President of Overseas Projects for the Anchorage Economic Development Corporation.
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Title Annotation:SPECIAL SECTION: International Trade
Comment:Sovereign wealth funds expansion: global investments include Alaska assets.(SPECIAL SECTION: International Trade)
Author:Wolf, Greg
Publication:Alaska Business Monthly
Date:Feb 1, 2017
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