“There are two primary reasons for the rapid appearance and growth of SWFs: the rapid increase in oil prices and the accumulation of large balance-of-payments surpluses,” according to a recently released Wharton Leadership Center study.
The researchers suggest that until the end of 2006, the existence of sovereign funds were unknown in financial circles. Beginning with 2007, a flurry of activities brought SWFs on the radar screens of the investment community.
But with little real investment experience, the fund managers made investment decisions that resulted in large losses for the funds. The Abu Dhabi Sovereign Wealth Fund lost $125 billion during the financial crisis in early 2009 because of investing in financial institutions, reported the Creditwritedowns website.
Gulf States Saudi Arabia, Kuwait, Qatar, and Abu Dhabi’s sovereign wealth fund assets dropped by $350 billion in total because of the global financial crisis.
“The financial meltdown did not just devastate Western economies. It also took large bites out of the sovereign wealth funds and inflicted some harsh lessons on those charged with running these funds, many of whom have solid careers behind them as bureaucrats and bankers rather than as mainstream investment managers,” said Anthony Harrington in an article on the QFinance website.
Norway’s SWF Recovering Nicely
In 2008, Norway’s SWF took a 15 percent plunge, but recovered in 2009, moving up 14 percent. Norway is the owner of the world’s second-largest sovereign wealth fund, the Norwegian Government Pension Fund.
“The financial crisis had a significant impact on the Government Pension Fund. However, the losses from 2008 were to a large extent recovered in 2009, faster than many had expected,” said Sigbjorn Johnsen, Norway’s Minister of Finance, in a recent statement.
Johnsen credits this recovery to a transparent process and the Ministry’s sound investment stratagem. The fund remained relatively healthy during the economic upheaval, as it does not have any liabilities.
