Oxford SWF Project

Ashby Monk

If you follow me on Twitter, you’ll know that I’ve been playing some SWF word association games. Well I’ve got another one for you: If I say, ‘governments that kicked off the SWF era’ or, how about, ‘governments that deserve credit for the big SWF idea’, what would you say?

At first blush, I’d expect you to come out with “Kuwait” or “Abu Dhabi” or “Singapore” or (if you’re really good) even “Kiribati”. But I can pretty much guarantee that you wouldn’t say, “the UK” or “USA”. After all, SWFs aren’t Western, right? In fact, they represent challenges to Western hegemony, don’t they? They’re products of emerging market imbalances, aren’t they?

Well, maybe I’m late to the party here, but I think credit for the ‘big SWF idea’ actually resides with…the UK and the US. I know that seems odd and runs counter to our current notions about SWFs. But let me — a self-proclaimed history dimwit — give you a history lesson (or at least try to).

It’s widely noted (and accepted) that Kuwait was the first country, in 1953, to set up a SWF. In this case, the acclaim for this remarkable decision is often given to the forward thinking ruler of Kuwait at the time, Sheikh Abdullah Al-Salem Al-Sabah. In his wisdom, he apparently decided that the money should be set aside for the long-term welfare of the people of Kuwait. And I don’t doubt that. Rather, I’d simply note that this SWF, which was known at the time as the Kuwait Investment Board, was established eight years before the country attained independence from the UK. And, moreover, the fund was set up in London. So, at the very minimum, we can assume that the Brits had some influence over this decision (and may in fact have had the ‘big SWF idea’).

The second country to set up a SWF, in 1956, is widely accepted to be Kiribati. In this case, a fund was set up for phosphate mining revenue. The history buffs among you will recognize that Kiribati was still under British rule at the time (until 1971 actually). And it is known that the British administration was behind the levy on phosphate exports that ultimately led to the Kirabati Revenue Equalisation Reserve Fund. So, once again, the Brits were there at the beginning.

Now things start to get really interesting. Any guess as to what the third country was to set up a SWF in 1958? To be fair, that’s sort of a trick question, as it was sponsored by a sub-national government: the US state of New Mexico and the State Investment Council. And do you know who set up the fourth SWF in 1974? The US State of Wyoming and the Permanent Wyoming Mineral Trust Fund. And North America wasn’t done yet, as the next two SWFs to pop up were in Alaska and Alberta in 1976. In short, the Brit’s Anglo-American cousins in North America also played an important role in legitimizing SWFs in these early years.

Now, it’s true that Singapore set up Temasek in 1974, but, at the time, it was really just a holding company and not technically an international portfolio investor. (And, by the way, Singapore was also a British Colony until 1961, so there was probably some remaining British influence.) It’s also true that the Abu Dhabi Investment Authority was established in 1976, but, there again, it’s probably reasonable to suggest the Brits had some influence in that decision (as the UAE had a ‘special treaty’ with the UK until 1971).

All that being said, I don’t want to give the Brits too much credit here. After all, they didn’t bother to set up a SWF of their own when oil revenues came pouring in from the North Sea! (A decision that still irks Scotland something fierce). To be sure, this would be a very welcome pool of cash today.

I guess I just find it interesting that the first SWFs were set up under the purview of British and American governments. Over time, the West has come to see SWFs as “foreign” and “non-Western”. And yet, they were ultimately British and American creations; the idea and their legitimacy actually came from the West!

And, the more I think about it, the more it makes sense. Both countries were already home to global financial centers (New York and London) thanks to the financial capital flowing out of pre-funded pensions and into asset managers’ coffers. Let’s also not forget that Markowitz unveiled Modern Portfolio Theory in a 1952 Journal of Finance article. As such, these countries were clearly in a ‘financial state of mind’, which means it wouldn’t have been too far a leap for these governments to see an opportunity to use financial markets in innovative ways. Enter the SWF.