Chapter

The European Funds

Christopher Balding

in Sovereign Wealth Funds

Published in print February 2012 | ISBN: 9780199842902
Published online May 2012 | e-ISBN: 9780199932498 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780199842902.003.0005
The European Funds

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The two largest European sovereign wealth funds are in Norway and Russia. While each gain their sovereign wealth fund capital from natural resource extraction each country targets different investment objectives with divergent management styles and broader macroeconomic framework. Norway operates its fund as a generational fund for the benefit of future citizens while Russia initially established its fund as a type of rainy day account. What distinguishes Norway and Russia from other funds is the level of transparency in their funds. Norway publishes regulations, ethics, investment decisions, capital levels, and annual returns. Russia specifies by law its investments and publishes monthly updates to paid in capital, investment allocation, and annual returns. Though they both have established and transparent frameworks, the similarities end there. Norway manages a diversified portfolio of equity and fixed income securities with benchmark returns, risk budgets, and clear decision making capital withdrawals to fund government budgets. Conversely, Russia maintains a low risk portfolio of bank deposits and high quality primarily short term sovereign and corporate debt. The Russian preference for running large government budget deficits financed by capital withdrawals from their sovereign wealth fund has fueled wasteful spending and large drops in balances. While an ideal national wealth risk management profile may more closely replicate the Russian investment allocation, their economic and political management reveals the temptations facing commodity rich states.

Keywords: sovereign wealth funds; norway; russia; corporate governance; fiscal policy; transparency; portfolio management; asset allocation; foreign exchange; risk

Chapter.  9684 words.  Illustrated.

Subjects: Financial Markets

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