A sovereign wealth fund (SWF) is a fund owned or controlled by a government whose primary purpose is to invest in real and financial assets. In recent years, SWFs have grown in number and assets under management. There are over 90 SWFs around the world managing approximately $8 trillion in assets.

A SWF generally has certain financial objectives that guide its investment decisions. The SWF’s investment strategy may be passive or active, and its strategy may be conservative or yield-seeking. A SWF with a more conservative and passive investment strategy will focus its investments on fixed-income assets.

The funding sources for a SWF may include revenues from commodities or natural resources, foreign exchange reserves, bank reserves, trade surpluses and government transfer payments. There are several categories of SWFs, including saving funds, stabilization funds, strategic funds and public benefit pension funds.

Savings funds aim to set aside money for future generations. Investments in savings funds have decades-long time horizons. They are particularly common in commodity-rich and natural resource exporting nations. By investing in foreign assets, savings funds provide a hedge against risks in the domestic economy.

Stabilization funds are commonly referred to as rainy day funds. They provide a pool of capital to mitigate the impact of unforeseen economic shocks caused by events such as tax hikes, political crises, significant increases in oil or gas prices and rises in the unemployment rate. Stabilization funds can be particularly useful for countries that are economically dependent on oil, gas or other commodities.

Strategic funds aim to promote the domestic economy of a country. They may deploy a variety of investment strategies such as acquiring direct stakes in companies in specific industries or financing early-stage companies. They may also take an active role in managing the companies in their portfolio. Singapore’s Temasek Holdings is an example of a SWF that is classified as a strategic fund. Founded in 1974, Temasek has a diversified portfolio across a broad range of industries including transportation, industrials, life sciences, media & technology, telecommunications, real estate and consumer products. Its investments are primarily in equities.

SWFs that are public benefit pension funds set aside money for a country’s pension system. Such funds are particularly important in countries that have a high elderly population and low birth rate. For example, the Government Pension Investment Fund for Japan is the largest retirement savings pool in the world.

The largest SWF in the world is the Government Pension Fund of Norway. It was established to invest the large revenues generated from Norway’s oil and gas sector and is managed by Norges Bank Investment Management. The success of Norway’s approximately $1.7 trillion SWF is partly attributable to its diversified investment portfolio. The Government Pension Fund of Norway has investments spread across over 70 countries and around 9,000 companies globally.

Other large SWFs include the China Investment Corporation, Abu Dhabi Investment Authority, Kuwait Investment Authority, Saudi Arabia’s Public Investment Fund and Singapore’s GIC Private Limited.

SWFs will likely continue to grow in size and number in the future. The trend of seeking investment opportunities in non-traditional asset classes, such as real estate, hedge funds and commodities, will also likely endure.