CAIA - 05 - Sovereign Wealth Funds

Question 1

SWFs’ initial allocations are generally almost all in ___ and ___ ___, since assets are used to stabilize a country’s economy against volatile revenues, foreign trade, and capital flows.

Answer 1

SWFs’ initial allocations are generally almost all in cash and fixed income, since assets are used to stabilize a country’s economy against volatile revenues, foreign trade, and capital flows.

Question 2

The common sources of wealth for a sovereign wealth fund are:

1. ___ ___
2. ___ ___ Money
3. ___ ___

Answer 2

The common sources of wealth for a sovereign wealth fund are:

1. Trade Surpluses

2. Foreign Aid Money

3. Natural Resources

Question 3

The ___ of ___ is a record of a country’s transactions and cash flows associated with its foreign transactions in a given period.

Answer 3

The balance of payments is a record of a country’s transactions and cash flows associated with its foreign transactions in a given period.

Question 4

The balance of payments is composed of two accounts:

1. ___ Account
2. ___Account

Answer 4

The balance of payments is composed of two accounts:

1. Capital Account
2. Current Account

Question 5

The ___ account measures investment flows of purchases and sales of foreign assets and debt.

Answer 5

The capital account measures investment flows of purchases and sales of foreign assets and debt.

Question 6

A country with a ___ ___ ___ has more imported capital than exported capital.

Answer 6

A country with a capital account surplus has more imported capital than exported capital.

Question 7

The ___ account measures trade in goods and services, investment income and gifts. Components include ___and ___goods and services.

Answer 7

The current account measures trade in goods and services, investment income and gifts. Components include commodities and manufactured goods and services.

Question 8

In a country with a ___ ___ ___, the value of imports of goods and services exceeds that of exports, so more money leaves the country to buy goods/services than comes in from the sales thereof.

Answer 8

In a country with a current account deficit, the value of imports of goods and services exceeds that of exports, so more money leaves the country to buy goods/services than comes in from the sales thereof.

Question 9

A central bank’s ___ ___maintains its foreign currency holdings and is the sum of the capital and current accounts.

Answer 9

A central bank’s reserve account maintains its foreign currency holdings and is the sum of the capital and current accounts.

Question 10

What is the equation for change in the reserve account?

Answer 10

Question 11

Countries with floating exchange rates that have capital account surpluses generally have current account ___ in a given year because the ___ ___ brings the two accounts into equilibrium.

Answer 11

Countries with floating exchange rates that have capital account surpluses generally have current account deficits in a given year because the currency market brings the two accounts into equilibrium.

Question 12

A country’s currency tends to appreciate in value when the country has the following characteristics:

1. Lower ___ than its trading partners
2. Higher ___ ___ ___than its trading partners
3. ___ that attract capital inflow
4. Slower ___ ___ than its trading partners
5. ___or ___ ___ in export-oriented industries.

Answer 12

A country’s currency tends to appreciate in value when the country has the following characteristics:

1. Lower inflation than its trading partners
2. Higher real interest rates than its trading partners
3. Policies that attract capital inflow
4. Slower income growth than its trading partners
5. Competitive or comparative advantage in export-oriented industries.

Question 13

___ ___ ___ can be held by central banks or can be invested in SWFs

Answer 13

Foreign currency reserves can be held by central banks or can be invested in SWFs

Question 14

Commodity exporting countries have three key concerns regarding tax revenues:

1. Volatile ___ ___produce an ___income stream, which is incompatible with generally ___government spending
2. Commodity revenues will eventually experience ___since commodities cannot last forever
3. Governments prefer not to rely primarily on ______ but prefer to have a ______that also generates tax revenues from other industries.

Answer 14

Commodity exporting countries have three key concerns regarding tax revenues:

1. Volatile oil prices produce an unstable income stream, which is incompatible with generally stable government spending
2. Commodity revenues will eventually experience depletion since commodities cannot last forever
3. Governments prefer not to rely primarily on commodity revenues but prefer to have a diversified economy that also generates tax revenues from other industries.

Question 15

Sovereign Wealth Funds may be divided into four categories:

1. ___ Funds
2. ___Funds
3. ___Funds
4. ___Funds

Answer 15

Sovereign Wealth Funds may be divided into four categories:

1. Stabilization Funds
2. Savings Funds
3. Reserve Funds
4. Development Funds

Question 16

Central banks use reserves for three purposes:

1. To implement ___ ___
2. To intervene in the ___ ___market
3. To provide ___to prevent crises

Answer 16

Central banks use reserves for three purposes:

1. To implement monetary policy
2. To intervene in the foreign exchange market
3. To provide liquidity to prevent crises

Question 17

Countries with sizeable revenues put reserves in sovereign wealth ___ funds, which use the funds to insulate the economy and enable relatively stable government spending

Answer 17

Countries with sizeable revenues put reserves in sovereign wealth stabilization funds, which use the funds to insulate the economy and enable relatively stable government spending

Question 18

Stabilization funds are (cyclical/countercyclical), accumulating excess revenues during periods of high commodity prices and distributing the savings during periods of low commodity prices.

Answer 18

Stabilization funds are countercyclical, accumulating excess revenues during periods of high commodity prices and distributing the savings during periods of low commodity prices.

Question 19

The 3 general rules on transferring commodity revenues into SWFs are:

1. ___ ___rule
2. ___ ___rule
3. ___from the ___ ___rule

Answer 19

The 3 general rules on transferring commodity revenues into SWFs are:

1. Fixed percentage rule
2. Hurdle price rule
3. Deviation from the moving average rule

Question 20

Under the ___ ___rule, a fixed percentage of the commodity revenues is transferred to the SWF. The transfer is (procyclical/countercyclical) and the (easiest/hardest) rule to implement.

Answer 20

Under the fixed percentage rule, a fixed percentage of the commodity revenues is transferred to the SWF. The transfer is procyclical and the easiest rule to implement.

Question 21

Under the ___ ___rule, all commodity revenues above a certain price are transferred to the SWF.

Answer 21

Under the hurdle price rule, all commodity revenues above a certain price are transferred to the SWF.

Question 22

Under the ___ from the ___ ___ rule, commodity revenues that exceed a moving average are transferred to the SWF, while revenues below a moving average move proceeds out of the SWF into the government budget.

Answer 22

Under the deviation from the moving average rule, commodity revenues that exceed a moving average are transferred to the SWF, while revenues below a moving average move proceeds out of the SWF into the government budget.

Question 23

Sovereign wealth ___ ___are designed to increase financial wealth that can be distributed in the future.

Answer 23

Sovereign wealth savings funds are designed to increase financial wealth that can be distributed in the future.

Question 24

Some savings funds focus on investing in ___ ___assets that correspond to countries from which imported goods are purchased or the ___in which foreign debt is issued.

Answer 24

Some savings funds focus on investing in foreign currency assets that correspond to countries from which imported goods are purchased or the currency in which foreign debt is issued.

Question 25

Sovereign wealth ___ \_\_\_funds use proceeds of commodity or manufactured goods exports to invest for high total returns in order to meet estimated future pension related liabilities.

Answer 25

Sovereign wealth **pension reserve** funds use proceeds of commodity or manufactured goods exports to invest for high total returns in order to meet estimated future pension related liabilities.

Question 26

Sovereign Wealth ___ \_\_\_funds invest in total return portfolios in order to overcome the opportunity costs of cash and fixed-income dominated stabilization funds, while the assets in the ___ \_\_\_ funds are counted as reserves.

Answer 26

Sovereign Wealth **reserve investment** funds invest in total return portfolios in order to overcome the opportunity costs of cash and fixed-income dominated stabilization funds, while the assets in the **reserve investment** funds are counted as reserves.

Question 27

Sovereign wealth ___ \_\_\_are established to allocate resources to socio-economic projects to increase the country's productivity and future wealth. As such they invest in human capital, infrastructure and local industries.

Answer 27

Sovereign wealth **development funds** are established to allocate resources to socio-economic projects to increase the country's productivity and future wealth. As such they invest in human capital, infrastructure and local industries.

Question 28

Development funds are (more/less) concentrated than savings and reserve funds, and some are similar to private equity funds.

Answer 28

Development funds are **more** concentrated than savings and reserve funds, and some are similar to private equity funds.

Question 29

Development funds can pose conflicts of interest: 1. They may ___ \_\_\_systems 2. They may become \_\_\_for \_\_\_

Answer 29

Development funds can pose conflicts of interest: 1. They may **undermine public** systems 2. They may become **conduits** for **corruption**

Question 30

Development funds (should/should not) be separated from government agencies

Answer 30

Development funds **should** be separated from government agencies

Question 31

There are four common motivations that may result in a SWF being established 1. To protect a country's economy from a ___ or ___ in \_\_\_ 2. To help monetary authorities counter ___ \_\_\_. 3. To grow for ___ \_\_\_, particularly if the surplus was driven by a condition that may \_\_\_or become \_\_\_ 4. To invest in \_\_\_or economic growth projects to improve a \_\_\_of the \_\_\_or \_\_\_an \_\_\_.

Answer 31

There are four common motivations that may result in a SWF being established 1. To protect a country's economy from a **decline** or **volatility** in **revenues** 2. To help monetary authorities counter **unwanted liquidity**. 3. To grow for **future** **generations**, particularly if the surplus was driven by a condition that may **reverse** or become **depleted** 4. To invest in **infrastructure** or economic growth projects to improve a **sector** of the **economy** or **grow** an **industry**.

Question 32

Stabilization funds invest mostly in ___ and ___ \_\_\_

Answer 32

Stabilization funds invest mostly in **cash** and **fixed income**

Question 33

Savings and reserve funds make ___ allocations, similar to those of \_\_\_and \_\_\_funds

Answer 33

Savings and reserve funds make **diversified** allocations, similar to those of **pension** and **endowment** funds

Question 34

\_\_\_ results if the money supply grows faster than the availability of goods in the local economy.

Answer 34

**Inflation** results if the money supply grows faster than the availability of goods in the local economy.

Question 35

\_\_\_ \_\_\_refers to a large foreign currency inflow that negatively affects a country's other sectors by making them less price competitive in the market.

Answer 35

**Dutch disease** refers to a large foreign currency inflow that negatively affects a country's other sectors by making them less price competitive in the market.

Question 36

The discovery of a tradable natural resource or a significant rise in the price of a natural resource has two major effects: 1. It ___ \_\_\_ by shifting workers from other sectors to the commodity sector 2. The value of the local ___ \_\_\_ due to large inflows of cash

Answer 36

The discovery of a tradable natural resource or a significant rise in the price of a natural resource has two major effects: 1. It **increases wages** by shifting workers from other sectors to the commodity sector 2. The value of the local **currency increases** due to large inflows of cash

Question 37

One way to reduce the threat of Dutch disease is \_\_\_, which involves countering the effects of an economic event and a BOP surplus on the country's economy.

Answer 37

One way to reduce the threat of Dutch disease is **sterilization**, which involves countering the effects of an economic event and a BOP surplus on the country's economy.

Question 38

There are two forms of sterilizations: 1. Buy/sell ___ \_\_\_ 2. Invest ___ \_\_\_

Answer 38

There are two forms of sterilizations: 1. Buy/sell **government bonds** 2. Invest **revenues** **abroad**

Question 39

After a period of high commodity prices, a stabilization fund may end up being unnecessarily large and subject to a sizeable ___ \_\_\_ ___ \_\_\_ due to its concentration in cash and liquid fixed-income investments.

Answer 39

After a period of high commodity prices, a stabilization fund may end up being unnecessarily large and subject to a sizeable **conservative** **investment opportunity cost** due to its concentration in cash and liquid fixed-income investments.

Question 40

Before a stabilization fund begins investing in risky assets and creating a total return portfolio, its reserves should reach a ___ \_\_\_level.

Answer 40

Before a stabilization fund begins investing in risky assets and creating a total return portfolio, its reserves should reach a **reserve adequacy** level.

Question 41

The Greenspan-Guidotti rule states that a country's reserves should be held against \_\_\_% of the value of short-term debt.

Answer 41

The Greenspan-Guidotti rule states that a country's reserves should be held against **100**% of the value of short-term debt.

Question 42

Reserves may be held at the level of \_\_\_-\_\_\_ months of imports, or \_\_\_% of the money supply to assist the banking sector.

Answer 42

Reserves may be held at the level of **3-6** months of imports, or **20**% of the money supply to assist the banking sector.

Question 43

Growth in establishing sovereign wealth funds is driven by three key factors: 1. Existence of ___ \_\_\_profits 2. Countries with \_\_\_regimes 3. Countries with difficulties finding opportunities for ___ \_\_\_

Answer 43

Growth in establishing sovereign wealth funds is driven by three key factors: 1. Existence of **natural resource** profits 2. Countries with **autocratic** regimes 3. Countries with difficulties finding opportunities for **domestic investments**

Question 44

When it comes to SWF assets, are they highly concentrated in a few large SWFs or are they diversified amongst many SWFs? What is the concentration of SWFs?

Answer 44

SWF assets are highly concentrated. The 16 largest SWFs have over $6.1 trillion of the $7.2 trillion held by 70 SWFs

Question 45

Do countries typically have 1 SWF or multiple SWFs?

Answer 45

Countries typically have multiple SWFs, each with a separate objective

Question 46

SWFs should be ___ of governments and central banks, and managed by \_\_\_managers

Answer 46

SWFs should be **independent** of governments and central banks, and managed by **external** managers

Question 47

SWFs should have well-defined, transparent processes for ___ and ___ \_\_\_, and for reporting \_\_\_.

Answer 47

SWFs should have well-defined, transparent processes for **investment** and **risk management**, and for reporting **performance**.

Question 48

One concern with SWF, particularly in development funds, is that some may apply ___ \_\_\_that favor domestic companies/industries over foreign companies by means of tariffs, import quotas, or governmental subsidies to domestic companies.

Answer 48

One concern with SWF, particularly in development funds, is that some may apply **protectionist policies** that favor domestic companies/industries over foreign companies by means of tariffs, import quotas, or governmental subsidies to domestic companies.

Question 49

Do SWF investments have an effect on their portfolio companies stock prices or try to control their portfolio companies for their own benefit?

Answer 49

There is no evidence that SWFs try to exert control and affect stock prices

Question 50

The \_\_\_-\_\_\_ ___ Index was developed at the Sovereign Wealth Fund Institute as a way of rating transparency in SWFs with respect to their internal organization and disclosure of information. It consists of ___ principles of transparency, where ___ point is assigned for each satisfied principle.

Answer 50

The **Linaburg**-**Maduell Transaparency** Index was developed at the Sovereign Wealth Fund Institute as a way of rating transparency in SWFs with respect to their internal organization and disclosure of information. It consists of **ten** principles of transparency, where **one** point is assigned for each satisfied principle.

Question 51

The SWFI suggests that an SWF have a minimum rating of ___ on the ten-point scale to be considered adequately transparent.

Answer 51

The SWFI suggests that an SWF have a minimum rating of **eight** on the ten-point scale to be considered adequately transparent.

Question 52

The ___ \_\_\_ consist of ___ generally accepted principles and practices of good governance of SWFs

Answer 52

The **Santiago Principles** consist of **24** generally accepted principles and practices of good governance of SWFs

Question 53

\_\_\_ ___ is the world's largest SWF, with about $848 billion in assets in 2015. Like many SWFs, it has a small staff.

Answer 53

**Norway's GPFP** is the world's largest SWF, with about $848 billion in assets in 2015. Like many SWFs, it has a small staff.

Question 54

Prior to its 1969 discovery of oil, Norway had a ___ \_\_\_, which meant it could treat the discovery as a \_\_\_.

Answer 54

Prior to its 1969 discovery of oil, Norway had a **diversified economy**, which meant it could treat the discovery as a **windfall**.

Question 55

Norway's GPFG allocates primarily to ___ \_\_\_assets, mostly managed \_\_\_at \_\_\_costs. The \_\_\_model contrasts with the endowment/Yale model.

Answer 55

Norway's GPFG allocates primarily to **diversified liquid** assets, mostly managed **internally** at **low** costs. The **norway** model contrasts with the endowment/Yale model.

Question 56

A large portion of Norway's GPFG is invested in ___ positions in ___ companies.

Answer 56

A large portion of Norway's GPFG is invested in **small** positions in **foreign** companies.

Question 57

Norway's GPFG receives \_\_\_% of Norway's oil revenues, and transfers \_\_\_% of its value to the government budget every year.

Answer 57

Norway's GPFG receives **100**% of Norway's oil revenues, and transfers **4**% of its value to the government budget every year.

Question 58

China sponors three key \_\_\_based SWFs, each with different functions: ___ \_\_\_ of ___ \_\_\_ (SAFE), ___ \_\_\_ ___ (CIC), and the ___ \_\_\_ ___ Fund.

Answer 58

China sponors three key **export** based SWFs, each with different functions: **State Administration** of **Foreign Exchange** (SAFE), **China Investment Corporation** (CIC), and the **National Social Security Fund**.

Question 59

The ___ \_\_\_of ___ \_\_\_is a department in China's central bank that functions as a stabilization fund. It pursues \_\_\_returns with investments in \_\_\_assets. It provides little \_\_\_.

Answer 59

The **State Administration** of **Foreign Exchange** is a department in China's central bank that functions as a stabilization fund. It pursues **high** returns with investments in **risky** assets. It provides little **transparency**.

Question 60

The CIC portfolio is (diversified/concentrated), has a large ___ \_\_\_ allocation, and has considerable exposure to ___ \_\_\_.

Answer 60

The CIC portfolio is **concentrated**, has a large **private equity** allocation, and has considerable exposure to **external management**.

Question 61

Singapore sponsors two \_\_\_-based SWFs: the ___ \_\_\_ ___ and ___ \_\_\_.

Answer 61

Singapore sponsors two **export**-based SWFs: the **Government Investment Corporation** and **Temasek Holdings**.

Question 62

The Singapore ___ \_\_\_ ___ functions as a reserve investment fund, seeking to maximize returns on a global portfolio, with over \_\_\_% invested in a diversified portfolio of liquid stocks and fixed-income instruments.

Answer 62

The Singapore **Government Investment** **Corporation** functions as a reserve investment fund, seeking to maximize returns on a global portfolio, with over **80**% invested in a diversified portfolio of liquid stocks and fixed-income instruments.

Question 63

\_\_\_ \_\_\_is a development fund funded by proceeds from private sales of government-owned assets. Its primary objective is ___ \_\_\_ and ___ \_\_\_ in Asia. It focuses its investments on areas driven by ___ \_\_\_.

Answer 63

**Temasek Holdings** is a development fund funded by proceeds from private sales of government-owned assets. Its primary objective is **employment growth** and **economic development** in Asia. It focuses its investments on areas driven by **intellectual capital**.

Question 64

Temasek's portfolio is highly ___ by geography.

Answer 64

Temasek's portfolio is highly **concentrated** by geography.

Question 65

Temasek owns ___ stakes in companies that it holds

Answer 65

Temasek owns **large** stakes in companies that it holds