Chart of the Week: Sovereign Wealth Funds and Oil Prices

Over the past few decades, Sovereign wealth funds (SWFs) have become the preferred way for oil-rich nations to diversify their economies away from oil.

SWFs are “special investment funds created or owned by governments to hold foreign assets for long-term purposes,” according to the International Monetary Fund (IMF). They can also be used for stabilization and short-term liquidity.

This chart shows how the rise of oil prices and the creation of SWFs have gone hand-in-hand. The timing of SWFs’ establishment generally coincides with spikes in oil prices because SWFs are financed by surplus revenues that governments set aside for future development.

Oil and other natural resource reserves are finite and nations are planning for the “day after” their reserves are depleted. Countries like Indonesia have already turned from oil exporters to net importers of crude oil.

While their role as a cushion at the bottom of economic cycles is clearly defined, SWFs’ investment success in global markets has been mixed.

Before the credit crisis unfolded, SWFs collectively managed more than $5 trillion in assets but many of them saw 30-40 percent drops in 2008. The world’s largest SWF, the Abu Dhabi Investment Authority, lost 40 percent of its value during the crisis but still has $875 billion in assets as of last reporting.

Still, their long-term investment focus can be an important stabilizing factor for these developing economies.

About Frank Holmes 264 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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