A sovereign wealth fund (SWF) is an investment fund, a state-owned pool of money, with funding coming from surplus reserves from state-owned enterprises, reserves from budgeting excesses, foreign currency operations, and money from privatizations that is invested in various financial assets.
The US state of Texas was the first in 1854 to establish a program like this to fund its public schools. The Permanent School Fund was given state owned public lands for its seed capital. The first national sovereign wealth fund was the Kuwait Investment Authority in 1953 to invest its excess oil revenues.
The basic concept is that a government takes excess capital from whatever sources, including state-owned business, and uses those as fuel for investments that will generate a higher return than idle cash or underutilized assets.
House Bill 6398 will establish the “Maharlika Investment Fund” (MIF), the purpose of which is to “generate consistent and stable investment returns with appropriate risk limits to preserve and enhance long term value of the Fund, obtain the best absolute return and achievable financial gains on its investments, and to satisfy the requirements of liquidity, safety/security, and yield in order to ensure profitability.”
The initial P250 billion funding will come from the Government Service Insurance System, Social Security System, Land Bank of the Philippines, and the Development Bank of the Philippines. The bill provides for funding from “other sources, which include special assessments on natural resources, and public borrowing, among others.”
The fund can invest its money in just about any domestic or global financial asset as well as “joint ventures or co-investments and commercial real estate and infrastructure projects.” In addition, “other investments as may be approved by the Board.”
We have some concerns about funding coming from “public borrowing, among others” and “other investments.”
In the greater scheme of things, a SWF with initial capital of approximately $5 billion is relatively insignificant. The largest SWF is the Norway Government Pension Fund Global with about $1.5 trillion “Assets Under Management.” The MIF will rank globally next to Angola and Botswana, but ahead of Mongolia.
In principle, the MIF is a valid concept. So was the Nauru Phosphate Royalties Trust. In 1970, the newly independent Nauru government bought its phosphate mines from colonial ruler Australia for A$21 million. The mines kicked off about A$80 million net profit a year. The Trust invested globally including owning the tallest in the Philippines, the Pacific Star in Makati. The phosphate deposits were virtually exhausted by 2000. The Trust was A$240 million debt and the government was totally bankrupt.
For all the benefits, a SWF is not a guaranteed cash cow.
South Korea’s sovereign fund, the Korea Investment Corporation with $117 billion worth of global assets, posted $28.4 billion loss in the first eight months of 2022. The fund’s return on investment went negative to minus 13.9 percent as global stock and bond markets suffered turmoil.
Norway’s sovereign wealth fund had a loss of $174 billion in the first half of 2022, also as stock markets went down. The fund returned a negative 14.4 percent for the period including a 4.4 loss in the 2022 third quarter. “Equity investments are down with as much as 17 percent. Technology stocks have done particularly poorly with a return of negative 28 percent, the CEO of Norges Bank Investment Management, Nicolai Tangen, said in a press release.”
On the other hand, the Investment Corporation of Dubai (ICD) posted the best-ever revenues and net profit in the first half of 2022 by investing in Emirates National Oil Company, which contributed 26 percent of total revenue. Its investments in Emirates Airline, Flydubai, and Dubai Aerospace Enterprise have historically brought in 43 percent of revenues.
The success of any SWF like the “Maharlika Investment Fund” simply comes down to the success of its investments, the way the funding is obtained, and how the money is handled. Good idea? Only time will tell as with every investment scheme.