Sovereign Wealth Funds: Publicly Available Data on Sizes and Investments for Some Funds Are Limited
Released: 2008-10-06T00:00:00

Letter

Background

No one commonly accepted definition of SWFs exists, although the feature of a government-controlled or government-managed pool of assets is a part of most definitions. Government officials and private researchers use varying characteristics to categorize SWFs, and depending on the source and primary defining characteristic, different types of funds may be included or excluded. Definitions have been developed by Treasury, IMF, and private researchers. Some definitions include pension funds or investments made from foreign currency reserves maintained in central banks. An explanation of how we chose funds to include in our analysis is in appendix I.

Countries with SWFs Are Accumulating Large Foreign Currency Reserves

Countries that are major exporting nations or natural resource providers may accumulate large amounts of foreign currency reserves through the sale of their manufactured goods or natural resources to other nations. While all countries need some amount of foreign currency reserves to meet their international payment obligations, in some cases countries may accumulate currency reserves in excess of the amounts needed for current or future obligations. Some countries invest their foreign exchange reserves in assets such as the sovereign debt of other countries, including securities issued by Treasury to fund U.S. government operations. However, some countries have formed SWFs to invest a portion of their excess foreign currency reserves in assets likely to earn higher returns, such as the equity shares issued by foreign publicly traded companies.

Some countries with current account (a broad measure of international flows that includes trade balances) surpluses have created SWFs. These include countries that are major exporters of commodities or natural resources, such as oil, as well as those, such as China, that are exporters of manufactured goods. In contrast, as the world’s largest importer of goods and natural resources, the United States has run increasingly large current account deficits since the early 1990s. The current account deficit of the United States was $731.2 billion in 2007, whereas Asian countries with SWFs had a combined current account surplus of over $400 billion and oil-producing countries with SWFs had a combined surplus of about $338 billion (see fig. 1).

These current account surpluses have led to a buildup of foreign currency reserves in some countries. Since 1995, currency reserves in industrial economies have more than doubled and currency reserves in developing economies have increased sevenfold. Foreign currency accumulation has been especially large among oil-producing countries and Asian countries with large trade surpluses, especially with the United States. China, Korea, Japan, and Russia hold the largest quantities of foreign currency reserves. Asian exporting countries’ combined current account surpluses grew from $53 billion in 2000 to $443 billion in 2007. Currency reserves have accumulated in SWF countries (see fig. 2). The U.S. dollar accounted for slightly less than two-thirds of total central bank foreign reserve holdings of all countries as of the first quarter of 2008.

For oil-exporting countries with SWFs, which include some nations in the Middle East, as well as Norway and Russia, oil revenues remained relatively stable from 1992 to 1998. But in 1999, oil prices—as measured by the annual weighted world average price per barrel—began to rise (see fig. 3). Consequently, oil revenues have increased 561 percent for the major exporting nations from 1992 to 2006, the year for which the latest data were available. These revenue increases have occurred as the price of oil per barrel has increased from $23 in January 2000 to well over $100 in the first half of 2008, including over $137 in July 2008.

United States Reviews Some Foreign Investments

An interagency group is responsible for reviewing some foreign investment transactions in the United States. CFIUS, initially established by executive order in 1975, reviews some foreign investments in U.S. businesses, including some investments by SWFs. Section 721 of the Defense Production Act authorizes the President to suspend or prohibit mergers, acquisitions, or takeovers that could result in foreign control of a U.S. business if the transaction threatens to impair national security. The President delegated his section 721 authority to review individual transactions to CFIUS. CFIUS and its structure, role, process, and responsibilities were formally established in statute in July 2007 with the enactment of the Foreign Investment and National Security Act (FINSA). FINSA amends section 721 of the Defense Production Act to expand the illustrative list of factors to be considered in deciding which investments could affect national security and brings greater accountability to the CFIUS review process. Under FINSA, foreign government-controlled transactions, including investments by SWFs, reviewed by CFIUS must be subjected to an additional 45-day investigation beyond the initial 30-day review, unless a determination is made by an official at the deputy secretary level that the investment will not impair national security. CFIUS reviews transactions solely to determine their effect on national security, including factors such as the level of domestic production needed for projected national defense requirements and the capability and capacity of domestic industries to meet national defense requirements. If a transaction proceeds to a 45-day investigation after the initial 30-day review and national security concerns remain after the investigation, the President may suspend or prohibit a transaction. According to Treasury, for the vast majority of transactions, any national security concerns are resolved without needing to proceed to the President for a final decision. The law provides that only those transactions for which the President makes the final decision may be disclosed publicly.

Extent of Official Data from SWF Countries and Others on SWF Sizes and Investments Varies

Information about SWFs publicly reported by SWFs, the governments that control them, international organizations, and private researchers provides a limited picture of their size, investments, and other descriptive factors. Our analysis found that the amount and level of detail that SWFs and their governments report about their activities vary significantly, and international organizations that collect and publish various statistics about countries’ finances do not consistently report on SWFs. As a result, some of the available information about the size of certain of these funds consists of estimates made by private researchers. Based on a combination of data or estimates from these various sources, SWFs currently hold assets estimated to be valued from $2.7 trillion to $3.2 trillion. Several researchers expect SWFs to grow substantially in the coming years.

SWFs Exist in Most Regions of the World and Many Are Recently Created

In our analysis of the publicly available government sources and private researcher lists of SWFs, we identified 48 SWFs across 34 countries that met our criteria. These include funds from most regions of the world. Of the 48 SWFs we identified, 13 were in the Asia and Pacific region. Ten were located in the Middle East, with the remaining 25 spread across Africa, North America, South America, the Caribbean, and Europe. Some countries, such as Singapore, the United Arab Emirates, and the Russian Federation, have more than one entity that can be considered an SWF.

Some SWFs have existed for many years, but recently a number of new funds have been created. For example, the Kuwait Investment Authority and the Kiribati Revenue Equalization Reserve Fund have existed since 1953 and 1956, respectively. The Kuwait Investment Authority was founded to invest the proceeds of natural resource wealth and provide for future generations in Kuwait, and the Kiribati Revenue Equalization Reserve Fund was formed to manage revenues from the sale of Kiribati’s phosphate supply. However, since 2000, many commodity and trade- exporting countries have set up new SWFs. These funds have grown as a result of rising exports of commodities such as oil, whose prices have also risen. Of the 48 funds we identified, 28 have been established since 2000 and 20 of these can be classified as commodity funds that receive funds from selling commodities such as oil (see fig. 4).

The Amount and Type of Information SWFs Report about Their Characteristics and Activities Vary by Fund

Based on our review of public disclosures from SWFs on government Web sites, we determined that the extent to and the level of detail at which SWFs publicly report information on their sizes, specific holdings, or investment objectives varied. Based on these reviews, we found that 29 of 48 funds publicly disclosed the value of assets since the beginning of 2007. According to documents published by the countries, 17 of these 29 report asset figures that are subject to an annual audit by either an international public accounting firm or by the country’s national audit agency. In total, 36 of the 48 funds provided publicly reported size estimates, though some date back to 2003. While most provided a specific value, 2 reported only a minimum value. Among the largest 20 funds, 13 publicly reported total assets. Of the funds in our analysis, 24 of 48 funds disseminated information on fund-specific sites and 21 used other government Web sites, such as those belonging to the finance ministry or central bank.

Thirty funds reported at least some information on their investment activities. Of the largest 20 funds, 12 reported this information. Only 4 of the 48 funds fully disclose the names of all the entities in which they have invested. The level of detail reported by others’ funds varied. For example, 21 funds reported information about some of their investments, such as the names of their significant investments, while others disclosed only the regional breakdown of their holdings or gave only general statements about the types of assets and sectors in which they invested or planned to invest. These assets usually included equities, bonds, real estate, or other alternative investments.

We found that about 77 percent of the 48 SWFs publicly reported the purpose of their funds, with 13 of the largest 20 funds doing so. In many cases, fund purposes included using the country’s financial or natural resources to earn investment returns intended to benefit the country in various ways, including providing income for future generations, balancing the government’s budget, or preserving foreign currency purchasing power.

The information publicly reported about SWFs varies in part because of different disclosure requirements across countries. The nature, frequency, and content of any SWF information are reported at each country’s discretion. Some countries may restrict the type of reporting that can be released. For example, according to documents published by the government of Kuwait, Kuwaiti law requires the Kuwait Investment Authority to submit a detailed report on its activities to the Kuwaiti government authorities, but prohibits it from disclosing this information to the public. In contrast, according to Norwegian government documents, Norwegian law requires that the country’s SWF publicly release comprehensive and detailed information regarding its assets, objectives, and current holdings on a quarterly and annual basis. Some funds that are not required to disclose information have begun to do so voluntarily. For example, Temasek Holdings, an SWF located in Singapore, is not required by Singapore law to release financial performance reports, but it began doing so in 2004, according to a Temasek Holdings official. This official told us that each SWF operates in a different environment and must decide on the appropriate amount of transparency. The official said that since Temasek Holdings began publishing its annual review in 2004, it has disclosed more information each year.

The extent to which other large private classes of investors disclose information about their assets and investments also varies. For example, investors such as hedge funds and private equity funds that are not investment companies under U.S. securities laws have as their investors primarily institutions or high net worth individuals and are generally not required to publicly disclose information about their investment portfolios. In contrast, U.S. mutual funds are generally required to disclose certain information about their investment portfolios and portfolio transactions. While some SWFs disclose holdings information, officials of other SWFs expressed concerns that disclosures could be used by other investors in ways that could reduce the funds’ investment earnings.

International Organizations’ Data Collections Do Not Generally Obtain Information on SWF Size or Investments

International organizations collect and publish various statistics about countries’ finances, but report only limited information on SWFs. Until recently there has been a lack of guidance in macroeconomic statistical standards on the treatment of SWFs and no systematic review of whether the assets of these funds are included in the data reported. IMF officials have initiated an effort to increase the amount and specificity of SWF activities in IMF documents. Currently, IMF members are expected to disclose a range of fiscal and macroeconomic statistics, including countries’ balance of payments and their international investment position, that are made public in various IMF reports and IMF’s World Economic Outlook and Global Financial Stability Report. The data that countries report may include the level of reserves and the amount of external assets they hold. However, the coverage of SWFs in these statistics is not uniform, not least because SWFs can be included in different accounts depending on specific statistical criteria. According to IMF staff, the countries themselves determine whether to include the value of their SWF assets in their reserve assets or separately as external assets. In some cases, countries do not report any information about their SWF. Further, some member countries do not submit data on their international investment position to IMF. Analyzing a selection of 21 countries with SWFs, IMF staff found that only 11 included the value of their SWFs’ assets in either their balance of payments or international investment position data. IMF staff noted that members are not required to report the value of the SWF holdings as a separate line item and no member currently does so.

In addition to information from required data reporting, IMF staff also collected some information about SWFs through their consultations with individual countries. IMF staff periodically hold policy discussions—called Article IV consultations from the section of the IMF rules that requires them—in member countries to monitor their economic developments and outlook and assess whether their policies promote domestic and external stability. According to IMF staff, Article IV staff reports are expected to focus strictly on those issues. We reviewed publicly available Article IV reports, or summary reports in several cases, for the 34 countries that we identified as having SWFs. Based on this analysis, we found information about the size of a country’s SWF in the Article IV reports or public summaries for 13 of these countries. The extent of the information on SWFs publicly reported from the Article IV consultations varied, with some documents only noting that the country had such a fund and others providing the current level of assets in the SWF and country officials’ expectations for growth of the SWF through revenues or fiscal transfer.

IMF is implementing changes to its reporting that could expand the official data available on SWF activities. IMF officials have stated that collecting additional data on SWFs is important because of the fiscal, monetary, and economic policy impacts that the funds could have for IMF member countries and for the global economy, given their increasing prevalence and growth. IMF expects to implement new reporting guidance in 2009 that would call for countries to separately report their SWF holdings on a voluntary basis. While this is a positive development that could further expand the official information available, its success depends on the degree to which countries participate.

In addition, IMF is including guidance on how to properly classify SWF assets in its latest version of the balance of payments manual, which it expects to publish in late 2008. The current version of this manual was last updated in 1993 and does not address SWFs. In recognition of the growing number of SWFs, IMF officials told us that they began to address the methodological issues related to a definition of SWFs and SWF assets in 2005 and subsequently initiated an international consultation on the issue. IMF expects that this additional detail will provide an understanding of the location of SWF assets, which, depending on certain criteria, can be reported in either the reserve assets or the external accounts or in other accounts of a country’s financial accounts data. IMF notes that this new reporting item will help to facilitate proper identification of SWFs and may contribute to greater transparency and to a better understanding of their impact on the country’s external position and reserve assets. Treasury staff told us that they were involved in the group that considered these changes, and while the United States and some other countries would have preferred that the proposed SWF reporting be mandatory, the group chose the voluntary option.

In addition, IMF is facilitating and coordinating the work of the International Working Group of Sovereign Wealth Funds that is deliberating on a set of Generally Accepted Principles and Practices relating to sovereign wealth funds. These are intended to set out a framework of sound operation for SWFs. The specific elements are likely to come from reviews of good SWF practices. These principles are also aimed at improving the understanding of SWFs in both their home countries and recipient countries.

Other organizations involved in monitoring international financial developments do not regularly report on SWF activities. For example, the Organisation for Economic Co-operation and Development (OECD), an organization of 30 countries responsible for supporting global economic growth and trade, collects data on foreign direct investment inflows and outflows and national accounts information from its member countries and some selected nonmember countries. These data, however, do not specifically identify SWFs. Further, only 9 countries included in OECD’s surveys are known to have SWFs. Many countries with SWFs are not members of OECD. A recent document from OECD indicates that it is using other publicly available sources of data to estimate the size and asset allocation of selected SWFs. Recognizing the growing importance of SWFs, Group of Seven finance ministers and central bank governors, including officials from Treasury, proposed that OECD develop investment policy guidelines for recipient countries of SWF investment. According to recent OECD publications, the organization is focusing its SWF work on these guidelines.

Private Researchers Have Collected Some Information on SWFs

Because not all SWFs disclose their activities publicly, information about the size of some SWFs comes from estimates published by private researchers, including investment bank researchers and nonprofit research and policy institutions. Though their methodologies and data sources vary, these researchers generally begin by reviewing publicly available data and statements from national authorities of SWF countries, press releases, and other research reports. In some cases, they use confidential data, such as information provided to their firms’ trading staffs by SWF officials or private conversations with their firms’ investment managers. However, they are usually prohibited from publicly disclosing the sources of information received confidentially. At least one researcher we spoke with also used certain IMF balance of payments and World Economic Outlook statistics as proxies for SWF outflows and purchases. The researchers often make projections of the level of foreign reserves, commodity prices, amounts of transfers from reserves to the SWF, and the assumed rate of return for the fund to develop judgmental estimates of the current size of assets held by SWFs. These estimates have been published publicly by these researchers as part of their analysis of trends affecting world financial markets.

The researchers we spoke with acknowledged that the accuracy of their estimates is primarily limited by the sparse official data on SWFs. Researchers also cited other limitations, including difficulty in verifying underlying assumptions, such as the level of transfers from SWFs or the projected rates of return of the funds, and questionable accuracy and validity of data they use from secondary sources to support their models.

By analyzing the information reported by individual SWFs, IMF data, and private researchers’ estimates, we found the total assets held by the 48 SWFs we identified are estimated to be from $2.7 trillion to $3.2 trillion (see app. II for the list of funds). Many of these estimates were published in the last year prior to the significant rise in oil prices in the first half of 2008. The largest funds held the majority of these assets, with the largest 20 funds representing almost 95 percent and the largest 10 having more than 80 percent of the total SWF assets. The largest 20 funds had assets estimated to range from $2.5 trillion to $3.0 trillion, as shown in figure 5.

Total SWF Assets Are Currently Smaller Than Those Held by Other Large Investor Classes but Are Expected to Grow

Although SWFs have sizeable assets, their assets are a small portion of overall global assets and are less than the assets of several other large classes of investors. The estimated total size of the SWFs we identified, $2.7 trillion to $3.2 trillion, constituted about 1.6 percent of the estimated $190 trillion of financial assets outstanding globally as of the end of 2006. The estimated SWF holdings we identified likely exceed those of hedge funds, which most researchers estimated to be about $2 trillion. However, according to an estimate by the consulting firm McKinsey Global Institute, assets in pension funds ($28.1 trillion) and mutual funds ($26.2 trillion) exceed those of SWFs by a large margin.

SWF assets are expected to grow significantly in the future. SWFs are predicted to continue to grow significantly, to between $5 trillion and $13.4 trillion by 2017. IMF staff estimated that in the next 5 years assets in SWFs will grow to between $6 trillion and $10 trillion. The variation in estimates largely reflects researchers’ use of different methods and assumptions about future economic conditions. Though their methodologies varied, each of these researchers generally used several common factors, the most common being changes in oil prices. Several researchers stated that if oil prices rise higher than their projections, revenues going to oil-based SWFs will likely increase and the assets could grow beyond currently estimated levels. Other factors include growth in foreign exchange reserves, amount of transfers from surpluses to SWFs, persistence in trade imbalances, the rate of return or performance of an SWF, and variation in exchange rate regimes across SWF countries.

Public Information from the U.S. Government and Others on SWF Investments in U.S. Assets Is Limited

BEA and Treasury are charged with collecting and reporting information on foreign investment in the United States, but the extent to which SWFs have invested in U.S. assets is not readily identifiable from such data. Only a few SWFs reported specific information on their U.S. investments. Some individual SWF investments in U.S. assets can be identified from reports filed by investors and issuers as required by U.S. securities laws, but these filings would not necessarily reflect all such investments during any given time period. Further, some private data collection entities also report information on specific transactions by SWFs, but these also may not capture all activities.

U.S. Government Reports Aggregate Totals for Foreign Investment in the United States but Do Not Specifically Identify SWF Activities

Two U.S. agencies, Treasury and Commerce’s BEA, collect and report aggregate information on foreign investment in the United States that includes SWF investments. To provide information to policymakers and to the public, Congress enacted the International Investment Survey Act of 1976 (subsequently broadened and redesignated as the International Investment and Trade in Services Survey Act [International Investment Survey Act]), which authorizes the collection and reporting of information on foreign investment in the United States. The act requires that a benchmark survey of foreign direct investments and foreign portfolio investments in the United States be conducted at least once every 5 years. Under this authority, BEA collects data on foreign direct investment in the United States, defined as the ownership of 10 percent or more of a business enterprise. BEA collects the data on direct investment in the United States by both public and private foreign entities, which by definition would generally include SWFs, by surveying U.S. companies regarding foreign ownership. The data are used to calculate U.S. economic accounts, including the U.S. international investment position data.

Treasury collects data on foreign portfolio investment in the United States, defined as foreign investments that are not foreign direct investments. Treasury collects the data through surveys of U.S. financial institutions and others. These surveys collect data on ownership of U.S. assets by foreign residents and foreign official institutions. Officials from these agencies use these data in computing the U.S. balance of payments accounts and the U.S. international investment position and in the formulation of international economic and financial policies. The data are also used by agencies to provide aggregate information to the public on foreign portfolio investments, including reporting this information periodically in the monthly Survey of Current Business.

Data Collected by U.S. Agencies Show Considerable Foreign Investment in United States, but Do Not Identify SWF Activity

SWF investment holdings are included in the foreign investment data collected by Treasury and BEA, but cannot be specifically identified because of data collection limitations and restraints on revealing the identity of reporting persons and investors. BEA’s foreign direct investment data are published in the aggregate and do not identify the owner of the asset. BEA also aggregates the holdings of private and government entities for disclosure purposes. As a result, the extent to which SWFs have made investments of 10 percent or more in a U.S. business, while included as part of the foreign direct investment total, cannot be identified from these data.

Treasury’s portfolio investment data collection and reporting separates foreign official portfolio investment holdings, which include most SWFs, from foreign private portfolio investment. However, the information that is reported to Treasury does not include the specific identity of the investing organization; thus the extent of SWF investment within the overall foreign official holdings data cannot be identified. In addition, Treasury officials reported that some SWF investments may be classified as private if the investments are made through private foreign intermediaries, such as investment banks, or if an SWF is operated on a subnational level, such as by a state or a province of a country, as those types of organizations are not included in Treasury’s definition of official government institutions.

Both BEA and Treasury stated that the data published do not include the identity of specific investors and are aggregated to ensure compliance with the statutory requirement that collected information not be published or disclosed in a manner in which a reporting person can be identified. Figure 6 illustrates how data on SWF investments are included but are not specifically identifiable in the data collected or reported by these agencies. The data BEA and Treasury collect include the total amount of foreign direct investment and the total amount of portfolio investment by foreign official institutions, but the extent of SWF investments in either category cannot be determined. The data collected on both direct and portfolio investments are used by BEA in computing the U.S. international investment position, published annually in its July issue of the Survey of Current Business.

The U.S. international investment position data show that foreign investors, including individuals, private entities, and government organizations, owned assets in the United States in 2007 valued at approximately $20.1 trillion. As shown in figure 6, foreign direct investment, which includes all direct investments by SWFs, totaled $2.4 trillion in 2007 (shown in the line “Direct investment at current cost”). This is up from $1.4 trillion in 2000. Foreign official portfolio investment holdings, which include SWF investments, totaled $3.3 trillion in 2007 (shown in the line “Foreign official assets in the United States”). This is up from $1 trillion in 2000. BEA officials stated that within this total many of the SWF portfolio investment holdings are classified as “Other foreign official assets,” since this subcategory reflects transactions by foreign official agencies in stocks and bonds of U.S. corporations and in bonds of state and local governments. These reported holdings totaled roughly $404 billion in 2007. This shows an increase from $102 billion in 2000. To the extent that SWFs are invested in U.S. government securities, those holdings are included in the “U.S. Treasury securities” or “Other” subcategories of “U.S. government securities” under “Foreign official assets in the United States.” Bank accounts or money market instruments held by SWFs are included in “U.S. liabilities reported by U.S. banks” under “Foreign official assets in the United States.”

BEA and Treasury Data Show That Investment from Countries with SWFs and from Official Institutions Is Increasing

While BEA and Treasury data cannot be used to identify the total extent of SWF investment, these data show that the United States has been receiving more investment over time from countries with SWFs and from foreign official institutions. BEA data on foreign direct investment by country show an increase in foreign direct investment in the United States in recent years from countries with SWFs. These investments would include those made by private individuals and businesses and by any government entities in those countries—including their SWFs. As figure 7 illustrates, foreign direct investment holdings from countries with SWFs have increased from $173 billion in 2000 to roughly $247 billion in 2006. Although the exact extent cannot be determined, some of this increase is likely from SWF investments.

Similarly, Treasury data show that portfolio investment from foreign official institutions, which could include SWFs, has increased in all asset classes, including equities. Treasury’s portfolio investment by asset class data show that in 2007, approximately $9.1 trillion of all U.S. long-term securities were foreign owned, and of that, $2.6 trillion were held by official institutions. The $2.6 trillion in foreign official securities holdings includes almost $1.5 trillion in U.S. Treasury debt and $0.3 trillion in U.S. equities. While official institutions owned only a small share of the total amount of foreign-owned U.S. equities, their investment has grown dramatically, increasing from $87 billion in 2000 to $266 billion in 2007. (See fig. 8.) Treasury officials reported that the recent rise in U.S. equity ownership by foreign official institutions in the United States may reflect investments from SWFs, since SWFs are intended as vehicles to diversify a country’s reserves into alternative assets.

Although BEA and Treasury may be able to adjust their data collection activities to obtain more information about SWF investment, such changes may not result in more detailed public disclosure and will entail increased costs, according to agency officials. BEA officials told us that they may be able to use the information they currently collect to differentiate between foreign official and private owners of direct investment holdings in the data collected by utilizing the ultimate beneficial owner codes assigned to transactions in their surveys. They stated that they are considering reporting the information in this manner. This breakout would help to narrow the segment of foreign direct investment that contains SWF investments, but it would not identify SWF investment specifically since it would still combine SWF investments with other official government investments. Regarding portfolio investment, Treasury officials reported that while more detailed information would allow them to report SWF investment separately from that of other foreign official institutions, Treasury would be prohibited from releasing such information publicly in cases where it would make the foreign owners easily identifiable. According to a Treasury official, some business groups advised Congress during the initial passage of the International Investment Survey Act that disclosure of their transactions and holdings in foreign countries would adversely affect their companies. If foreign companies in the United States share that view, then removing the disclosure restriction might make foreign investors less likely to invest in the United States, and they might seek investments in countries with less stringent disclosure requirements. In addition, the official said that collecting additional information on foreign investment would increase costs for Treasury as well as for reporting entities. A representative of one financial institution that is a reporting entity told us that the institution would need to make changes to its internal reporting systems in order to provide more identifying information on investors, but the official could not estimate the total costs of doing so.

Some Information on Specific SWF Investments in the United States Is Available from SWF Disclosures and Private Sources

Some information on specific SWF investments in U.S. assets can be determined from disclosures made by SWFs themselves and from private data sources. A limited number of SWFs publicly disclose information about their investment activities in individual countries, including the United States. Based on our review of disclosures made on SWF or national government Web sites, we found that 16 of the 48 SWFs we identified provided some information on their investment activity in the United States. The amount of detail varied from a complete listing of all asset holdings of a fund to only information about how investments are allocated by location. For example, Norway’s SWF publishes a complete list of its holdings, which indicated that as of year-end 2006, its fund held positions in over 1,000 U.S. companies, valued at over $110 million. In contrast, the disclosures made by Kuwait’s fund did not identify its investments, but stated that the fund invests in equities in the United States and Canada; the fund did not provide information on total asset size or dollar values or identify specific investments. One of Singapore’s SWFs disclosed the identity of a few of its key holdings, including U.S.-based investments. Seven other funds also reported information on their investment holdings; however, none of these noted any U.S. investments.

Specific SWF Investments Are Disclosed in U.S. Securities Filings

Disclosure reports required to be filed with SEC by both investors and issuers of securities are a source of information on individual SWF transactions in the United States, but only for those transactions that meet certain thresholds. Any investor, including SWFs, upon acquiring beneficial ownership of greater than 5 percent of a voting class of an issuer’s Section 12 registered equity securities, must file a statement of disclosure with SEC. The information required on this statement includes identifying information, including citizenship; the securities being purchased and the issuer; the source and amount of funds used to purchase the securities; the purpose of the transaction; the number of shares acquired, and the percent of ownership that number reflects; and the identification of any contracts, arrangements, understandings, or relationships with respect to securities of the issuer.

When there are changes to the level of ownership or amount of securities held, the investor is generally required to file an amendment. Investors taking passive ownership stakes in the same equities, meaning they do not intend to exert any form of control, may qualify to file a less-detailed statement.

SEC also requires disclosure for investors, including SWFs, whose beneficial ownership of a class of voting equity securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 exceeds 10 percent. Under Section 16(a) of the Securities Exchange Act of 1934, within 10 calendar days of becoming a more than 10 percent beneficial owner, an investor must file an initial report disclosing the amount of the investor’s beneficial ownership of any equity securities of the issuer, whether direct or indirect. In addition, for as long as investors remain more than 10 percent beneficial owners, they must file reports of changes in beneficial ownership with the SEC within two business days of the transaction resulting in the change in beneficial ownership. This requirement applies to sales and additional purchases of any equity securities of the same issuer.

Certain beneficial ownership filings required under U.S. securities laws offer some information about SWF activities, but cannot be used to determine the full extent of SWF transactions in the United States. For example, any transaction involving a purchase resulting in total beneficial ownership of 5 percent or less of a voting class of an issuer’s Section 12 registered equity securities would not have to be disclosed under the federal beneficial ownership reporting rules and otherwise may not necessarily have to be disclosed. Thus, the SEC data would most likely not include information on SWF investments under this threshold. In addition, although the filing of these reports is mandatory for all investors who meet the requirements, SEC staff told us that without conducting a specific inquiry, their ability to determine whether all qualifying investments have been disclosed, including any by an SWF, may be limited. To identify nonfilers, the SEC staff told us that they sometimes use sources such as public comments and media reports. SEC has not brought a public action against an SWF for violating these beneficial ownership reporting requirements. Finally, given that these filings are primarily used to disclose ownership in the securities of specific issuers, the information is not compiled or reported by SEC in any aggregated format. Thus, identifying SWF transactions requires searching by issuer or SWF name, and SEC staff noted, for example, that identifying such transactions can be difficult because some SWF filers may have numerous subsidiaries under whose names they might file a report.

Information about some SWF investments in U.S. issuers can be identified in certain filings made under the federal securities laws. As a result of the recent interest in SWF activities, SEC staff analyzed such filings to identify transactions involving SWFs. To identify specific transactions, they searched for filings by known SWFs and also reviewed filings from countries with SWFs to identify SWF filings. According to their analysis, since 1990 eight different SWFs have reported to SEC ownership of over 5 percent, covering 147 transactions in 58 unique issuers. SEC staff told us that their analysis likely reflects only some of the SWF investments in U.S. issuers.

The federal securities laws also require U.S. public companies to file reports on their financial condition, which can also reveal data on some SWF investments in the United States below the greater than 5 percent threshold for investor disclosures. Companies with publicly traded securities are required to publicly disclose events they deem material to their operations or financial condition, such as the acquisition of assets or the resignation of officers. In some cases, U.S. companies have made these filings to announce that they have received investments from an SWF, including investments that did not exceed the 5 percent threshold and require a beneficial ownership filing by the SWF. For example, Citigroup filed a report outlining a transaction involving an SWF investment that was below the 5 percent ownership stake but the SWF investment was still deemed material to the financial condition of the company. Some of the U.S. companies that recently received SWF investments also included information about these transactions in their annual reports.

Private Data Collection Entities Compile and Report Information on SWF Investments in the United States but Do Not Capture All Activity

Private data collection entities compile and report information on specific SWF transactions, including those captured by SEC filings, but do not capture all SWF transactions. A number of private firms collect and distribute information relating to financial transactions. For example, database companies, such as Dealogic and Thompson Reuters, collect information globally on financial transactions, including mergers and acquisitions, for users such as investment banks, rating agencies, and private researchers. To compile their databases, they use public filings (including SEC filings), press releases, news announcements, and shareholder lists, as well as information from relationships with large financial intermediaries, such as investment banks and attorneys. Therefore, information in these databases includes transactions that can be identified through SEC filings but also may include additional transactions that are not disclosed through U.S. securities laws but are identified in other ways, such as through company press statements or discussions with parties to the transaction. However, these data may not be complete, and the database companies cannot determine to what extent they capture all SWF transactions. For example, officials at these companies told us that they will most likely miss smaller transactions, consisting of acquisitions resulting in aggregate beneficial ownership of 5 percent or less, or unannounced relatively small dollar deals. Since many SWFs have historically taken noncontrolling interests in U.S. companies with total ownership often below 5 percent, the number of transactions not captured could be large. In addition, a transaction completed by a subsidiary of an SWF may not be identified as an SWF investment.

We reviewed the information collected by Dealogic on investments made by SWFs in foreign countries, otherwise known as cross-border transactions. Based on this, the United States has, since 2000, attracted the largest volume of cross-border SWF investment, with announced deals totaling approximately $48 billion. Roughly $43 billion of this value reflects investment since 2007, largely consisting of deals involving financial sector entities. These deals comprised 8 of the top 10 announced SWF investments in the United States since 2000 (see table 1).

These large SWF-led investments into financial sector entities came at a time when firms were facing large losses and asset write-downs due to the subprime mortgage crisis of 2007. The investments were seen as positive events by some market participants because they provided much-needed capital. (See app. III for a summary of some of these transactions.)

According to Dealogic, Switzerland, China, and the United Kingdom were also major targets of cross-border SWF investments since 2000 (see fig. 9).

Dealogic data also show that announced cross-border investments led by SWFs worldwide have risen dramatically since 2000, both in terms of number of deals and total dollar volume. (See fig. 10) Transactions targeting the United States have also risen sharply, due in part to favorable market conditions for foreign investors. In 2005, only one announced U.S. transaction totaling $50 million was reported by Dealogic. In contrast, nine transactions were reported in 2007, totaling $28 billion. As of June 2008, four transactions in the United States have been announced for the year, totaling almost $20 billion. As shown in figure 10, global cross-border SWF investment increased from $429 million in 2000 to almost $53 billion in 2007.

However, these transactions, which have totaled about $119 billion since 2000, represent a small portion of the overall reported assets of SWFs, which, as noted previously, were estimated to be from $2.7 trillion to $3.2 trillion. This illustrates how much of the investment held by SWFs is not generally identifiable in existing public sources, unless SWFs themselves disclose comprehensive data on their asset holdings.

Agency Comments

We requested comments on a draft of this report from Treasury, Commerce, and SEC. In a letter, Treasury’s Deputy Assistant Secretary for International Monetary and Financial Policy indicated that our report was timely and valuable and underscored the importance of developing a better appreciation of the systemic role of SWFs, and also said that they generally agreed with the conclusions in the report. The Deputy Assistant Secretary’s letter stated that Treasury has been a leader in the international community’s efforts, including in the multi-lateral IMF- facilitated effort to develop generally accepted principles and practices for SWFs. Implementation of such practices will hopefully foster a significant increase in the information provided by SWFs. (Treasury’s letter is reproduced in app. V.)

In Commerce’s letter, the Undersecretary for Economic Affairs stated that our report was a useful and timely contribution to the existing literature on this highly debated and complex subject. (Commerce’s letter is reproduced in app. VI.) In SEC’s letter, the Director of the Office of International Affairs reiterated that the disclosure requirements under U.S. securities laws regarding concentrations and change of control transactions apply equally to SWFs and to other large investors. (SEC’s letter is presented in app. VII.) Treasury, Commerce and SEC also provided technical comments, which we incorporated into the report as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time we will send copies to other interested Members of Congress; the Secretaries of Treasury and Commerce; and the Commissioner of the SEC. We will also make copies available at no charge on the GAO website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact either Yvonne Jones at (202) 512-8678 or JonesY@gao.gov, or Loren Yager at (202) 512-4128 or YagerL@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VIII.

Appendix I: Objectives, Scope, and Methodology

Our objectives in this report were to examine (1) the availability of data on the size of sovereign wealth funds (SWF) and their holdings internationally that have been publicly reported by SWFs, their governments, international organizations, or private organizations, and (2) the availability of reported data by the U.S. government and other sources on SWF investments in the United States. To identify SWFs and to develop criteria for selecting the funds to include in our analysis, we reviewed the definitions of SWF and the lists of such funds that have been compiled by U.S. and international agencies, financial services firms, and private researchers. The funds of most interest to policymakers were those that are separate pools of capital without underlying liabilities or obligations to make payments in the near term. SWFs have raised concerns over their potential to use their investments for non-economic purposes. As a result, we chose to include in our analysis those funds that (1) were government chartered or sponsored investment vehicles; (2) invested, in other than sovereign debt, some or all of their assets outside the country that established them; (3) were funded through transfers from their governments of funds arising primarily from sovereign budget surpluses, trade surpluses, central bank currency reserves, or revenues from the commodity wealth of the countries, and (4) were not currently functioning as pension funds receiving contributions from and making payments to individuals. We included government-chartered or government-sponsored entities that invest internationally because such entities raise concerns over whether the controlling government will use their funds to make investments to further national interests rather than to solely earn financial returns. Entities that are funded primarily through trade surpluses or natural resources wealth would also seem to be more vulnerable to pressure to make noneconomic investments than entities funded through employee contributions or other nonwindfall sources. We excluded internationally active pension funds that are receiving contributions from or making benefit payments to individuals as these funds generally have specific liabilities, unlike SWFs that are not encumbered by such near-term obligations, and thus are not as likely to make noneconomic investments. We also excluded investment funds that invested only in the sovereign debt of other nations. Such an investment strategy is an approach that central banks have traditionally taken and, although widely debated, has not generally raised control issues. SWF investments in the equity securities of commercial firms in other countries may be viewed as creating the potential for actions of a noncommercial nature that could be detrimental to another country's economy.

In order to determine our final list of SWFs, we independently examined each fund on a compiled list of unique funds that others claimed were SWFs. We verified that our above criteria were met using national authorities and International Monetary Fund (IMF) data sources. To begin our analysis, we reviewed lists of SWFs generated from seven different private data sources and IMF. These sources, included in publications from Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, the Peterson Institute, RGE Monitor, Standard Chartered Bank, and IMF, were then used to prepare a comprehensive list of 258 possible SWFs. Since the names of the funds varied depending on the source, we manually matched the sources based on the fund name, inception year, and fund size to obtain a list of 81 unique funds.

After compiling the list of unique funds, we attempted to verify the extent to which the funds met our four criteria. We did this by having at least two analysts reach agreement on whether the criteria were met upon review of several data sources. We used official governmental source data, such as information from the country’s central bank, finance ministry, or other government organization or from the fund’s Web site. If official government source information was unavailable, we used the country’s Article IV consultation report or other documents reported to IMF as a secondary source. Those funds that did not meet any one of our four specified criteria were excluded from our analysis. In cases where we could verify some but not all of our criteria from national authority or IMF sources, we attempted to validate the remaining criteria using private or academic sources. Analyst judgment to include or exclude a fund was employed in some cases where all criteria could not be validated. Of the 48 funds selected for our analysis, we were able to verify all four criteria in 60 percent of cases. For all of the 48 funds we were able to verify two or more of our four criteria using a mix of various sources.

We encountered some limitations to our independent verification of national authorities’ source data. These limitations include Web searches only being conducted in English, Web sites being under construction, and Web sites being incompletely translated from the original source language to English. In these cases, we located speakers of the languages in question and assisted them in conducting searches for SWF information on the national government Web sites in the country’s language. If our team members who were knowledgeable of the foreign language found relevant information, we asked them to translate the information to English and provide us with a written copy. We used this translated information to verify our criteria for 10 funds. Languages needing translation were Arabic, French, Portuguese, and Spanish. If we found sources in English that were relevant for our purposes, we did not review the sources in their original languages.

To determine the availability of data on the size and other characteristics of SWFs that were reported by SWFs, their governments, international organizations, or private sources, we reviewed documents produced by SWFs and Web sites sponsored by SWFs. We also reviewed studies of SWFs done by investment banks and private research firms. For some recently established funds, we reported the initial capitalization of the fund if the market value of the fund was not available. We used a private researcher estimate for one fund that only reported a minimum value and for two funds where private researcher data appeared to be more recent than those of national authorities. We interviewed officials from two SWFs, investment banks, finance and trade associations, a private equity group, IMF, and others.

To determine the availability of data on SWF investments in the United States reported by the U.S. government and others, we reviewed the extent to which federal data collection efforts of the Departments of the Treasury (Treasury) and Commerce (Commerce) and the Securities and Exchange Commission (SEC) were able to report on SWF activities. We interviewed officials from Commerce and Treasury, SEC, the Federal Reserve Bank of New York, two financial data companies, a law firm, several private researchers, and other organizations.

We analyzed data on SWF cross-border transactions in the United States and other countries obtained from Dealogic, which designs, develops, and markets a suite of software, communications, and analytical products. We assessed the procedures that Dealogic uses to collect and analyze data and determined that the data were sufficiently reliable for our purposes. To identify the transactions, we worked with Dealogic to develop a query that would extract all transactions with an SWF as the acquirer of the asset and where the asset resided in a country other than that of the SWF. However, Dealogic does not capture all SWF transactions. Because of its reliance on public filings, news releases, and relationships with investment banks, Dealogic may not capture low-value transactions that are not reported publicly. We also reviewed public filings, obtained through SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database, of selected U.S. companies that received major SWF investments in 2007 and 2008. Because acquisitions resulting in total beneficial ownership of 5 percent or less of a voting class of a Section 12 registered equity security will not be reported to SEC, these data sources capture only a proportion of the total U.S. SWF investments.

We also spoke with officials from the Board of Governors of the Federal Reserve System, Commerce, the Department of Defense, the Department of State, the Federal Reserve Bank of New York, Treasury, IMF, SEC, and the U.S. Trade Representative. We attended hearings on SWFs before the Senate Committee on Banking, Housing, and Urban Affairs, the Senate Committee on Foreign Relations, the House Committee on Foreign Affairs, and the House Committee on Financial Services, the Joint Economic Committee, and the U.S.-China Economic and Security Review Commission. We met with officials representing investment funds or SWFs from Dubai, Norway, and Singapore. To better understand the context behind SWFs, we interviewed industry and trade associations, a legal expert, investment banks, private researchers, and others who have experience in international finance, trade, and foreign investment issues.

We conducted this performance audit from December 2007 through August 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: SWFs Meeting GAO Criteria

odSize of fund (doll in illion)

Government Penion Fnd--GlobaKit Invetment Athority (KIA)

Size of fund (dollar in billion)

Severnce Tx Permnent Fnd (New Mexico)

Permnent Minerl Trust Fnd (Wyoming)

Fond de Genertion (Qec)

The IMF data contain information from Article IV consultation reports, IMF staff reports, and a memorandum of understanding. The date range for the IMF data is from September 2006 through 2007.

Private researcher data contain information from reports from Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, the Peterson Institute, Standard Chartered Bank, and RGE Monitor. The publication dates for these reports range from September 10, 2007 through May 22, 200.

For Gabon, Singapore, and Vietnam, private researcher estimates were used instead of the national authority sources because the private researchers appeared to provide more up-to-date estimates of the size of the funds. São Tomé and Príncipe had a balance of $100 million as of September 1, 2006. We report a zero balance due to rounding.

Appendix III: Summary of SWF Investments in Financial Institutions

In 2007 and early 2008, SWFs, in conjunction with other investors, supplied almost $43 billion of capital to major financial firms in the United States. Citigroup was the major recipient of capital, receiving $20 billion in late 2007 and early 2008. The other recipients were Merrill Lynch, Morgan Stanley, the Blackstone Group, and the Carlyle Group. Below is a timeline of these transactions and their history.

Appendix IV: Definitions and Lists of SWFs

Some government organizations, an international financial institution, investment banks, and private research organizations have published reports on SWFs that offer explicit definitions of SWFs or lists of SWFs. Those that propose definitions of SWFs have not come up with one commonly accepted definition. Varying characteristics—ownership, governance, funding sources, and investment strategies, among others— are used to characterize SWFs and include or exclude funds from SWF lists.

Treasury defines SWFs as government investment vehicles funded by foreign exchange assets that are managed separately from official reserves. They seek higher rates of return and may be invested in a wider range of asset classes than traditional reserves. Treasury says that SWFs generally fall into two categories based on the source of their foreign exchange assets: commodity and noncommodity funds. Treasury has not released a list of SWFs.

IMF defines SWFs as government-owned investment funds set up for a variety of macroeconomic purposes. They are commonly funded by the transfer of foreign exchange assets that are invested long term and overseas. SWFs are a heterogeneous group and may serve multiple, overlapping, and changing objectives over time: as stabilization funds to insulate the budget and economy against commodity price swings; as savings funds for future generations; as reserve investment corporations established to increase the return on reserves; as development funds to help fund socioeconomic projects or promote industrial policies; or as contingent pension reserve funds to provide for unspecified pension liabilities on the government’s balance sheet. IMF researchers have published a list of SWFs. This relatively broad definition allows for inclusion of a Saudi Arabian investment fund managed from the central bank.

Some investment bank reports have offered definitions of SWFs. One states that SWFs are broadly defined as special government asset management vehicles that invest public funds in a wide range of financial instruments. Unlike central banks, which focus more on liquidity and safekeeping of foreign reserves, most SWFs have the mandate to enhance returns and are allowed to invest in riskier asset classes, including equity and alternative assets, such as private equity, property, hedge funds, and commodities. This bank does publish a list of SWFs. It says that it is not always easy to differentiate between pure SWFs and other forms of public funds, such as conventional public sector pension funds or state-owned enterprises. Another investment bank defines SWFs as having five characteristics: (1) sovereign, (2) high foreign currency exposure, (3) no explicit liabilities, (4) high-risk tolerance, and (5) long investment horizon. Similar to SWFs are official reserves and sovereign pension funds. Another investment bank says that SWFs are vehicles owned by states that hold, manage, or administer public funds and invest them in a wider range of assets of various kinds. SWFs are mainly derived from excess liquidity in the public sector stemming from government fiscal surpluses or from official reserves at central banks. They are of two types—either stabilization funds to even out budgetary and fiscal policies of a country or intergenerational funds that are stores of wealth for future generations. SWFs are different from pension funds, hedge funds, and private equity funds. SWFs are not privately owned. This investment bank researcher does offer a list of SWFs.

Some non-investment-bank private researcher reports have offered definitions of SWFs. One researcher says that SWFs are a separate pool of government owned or government-controlled assets that include some international assets. The broadest definition of an SWF is a collection of government-owned or government-controlled assets. Narrower definitions may exclude government financial or nonfinancial corporations, purely domestic assets, foreign exchange reserves, assets owned or controlled by subnational governmental units, or some or all government pension funds. This researcher includes all government pension and nonpension funds to the extent that they manage marketable assets. This researcher does publish a list of SWFs. Another private research group defines an SWF as meeting three criteria: (1) it is owned by a sovereign government; (2) it is managed separately from funds administered by the sovereign government’s central bank, ministry of finance, or treasury; and (3) it invests in a portfolio of financial assets of different classes and risk profiles, including bonds, stocks, property, and alternative instruments, with a significant portion of its assets under management invested in higher-risk asset classes in foreign countries. This researcher thinks of SWFs as part of a continuum of sovereign government investment vehicles that runs along a spectrum of financial risk, from central banks as the most conservative and risk averse, to traditional pension funds, to special government funds, to SWFs, and finally to state-owned enterprises, which are the least liquid and are the highest-risk investments. This research group publishes a list of SWFs.

Appendix V: Comments from the Department of the Treasury

Appendix VI: Comments from the Department of Commerce

Appendix VII: Comments from the U.S. Securities and Exchange Commission

Appendix VIII: GAO Contacts and Staff Acknowledgments

GAO Contacts

Acknowledgments

In addition to the contacts named above, Cody Goebel, Assistant Director; Celia Thomas, Assistant Director; Patrick Dynes; Nina Horowitz; Richard Krashevski; Jessica Mailey ; Michael Maslowski; Marc Molino; Omyra Ramsingh; and Jeremy Schwartz made major contributions to this report.