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CAIA > CAIA - 05 - Sovereign Wealth Funds > Flashcards

CAIA - 05 - Sovereign Wealth Funds Flashcards

1
Q

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.

A

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.

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2
Q

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

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

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

1. Trade Surpluses

2. Foreign Aid Money

3. Natural Resources

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3
Q

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

A

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

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4
Q

The balance of payments is composed of two accounts:

  1. ___ Account
  2. ___Account
A

The balance of payments is composed of two accounts:

  1. Capital Account
  2. Current Account
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5
Q

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

A

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

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6
Q

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

A

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

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7
Q

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

A

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

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8
Q

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.

A

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.

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9
Q

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

A

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

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10
Q

What is the equation for change in the reserve account?

A
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11
Q

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.

A

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.

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12
Q

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.
A

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.
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13
Q

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

A

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

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14
Q

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.
A

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.
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15
Q

Sovereign Wealth Funds may be divided into four categories:

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

Sovereign Wealth Funds may be divided into four categories:

  1. Stabilization Funds
  2. Savings Funds
  3. Reserve Funds
  4. Development Funds
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16
Q

Central banks use reserves for three purposes:

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

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
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17
Q

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

A

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

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18
Q

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

A

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

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19
Q

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

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

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
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20
Q

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.

A

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.

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21
Q

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

A

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

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22
Q

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.

A

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.

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23
Q

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

A

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

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24
Q

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.

A

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.

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25
Q

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.

A

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.

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26
Q

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.

A

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.

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27
Q

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.

A

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.

28
Q

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

A

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

29
Q

Development funds can pose conflicts of interest:

  1. They may ___ ___systems
  2. They may become ___for ___
A

Development funds can pose conflicts of interest:

  1. They may undermine public systems
  2. They may become conduits for corruption
30
Q

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

A

Development funds should be separated from government agencies

31
Q

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 ___.
A

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.
32
Q

Stabilization funds invest mostly in ___ and ___ ___

A

Stabilization funds invest mostly in cash and fixed income

33
Q

Savings and reserve funds make ___ allocations, similar to those of ___and ___funds

A

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

34
Q

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

A

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

35
Q

___ ___refers to a large foreign currency inflow that negatively affects a country’s other sectors by making them less price competitive in the market.

A

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.

36
Q

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
A

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
37
Q

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.

A

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.

38
Q

There are two forms of sterilizations:

  1. Buy/sell ___ ___
  2. Invest ___ ___
A

There are two forms of sterilizations:

  1. Buy/sell government bonds
  2. Invest revenues abroad
39
Q

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.

A

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.

40
Q

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

A

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

41
Q

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

A

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

42
Q

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

A

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

43
Q

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 ___ ___
A

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
44
Q

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?

A

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

45
Q

Do countries typically have 1 SWF or multiple SWFs?

A

Countries typically have multiple SWFs, each with a separate objective

46
Q

SWFs should be ___ of governments and central banks, and managed by ___managers

A

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

47
Q

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

A

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

48
Q

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.

A

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.

49
Q

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

A

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

50
Q

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.

A

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.

51
Q

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

A

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

52
Q

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

A

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

53
Q

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

A

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.

54
Q

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

A

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

55
Q

Norway’s GPFG allocates primarily to ___ ___assets, mostly managed ___at ___costs. The ___model contrasts with the endowment/Yale model.

A

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

56
Q

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

A

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

57
Q

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

A

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

58
Q

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

A

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.

59
Q

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 ___.

A

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.

60
Q

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

A

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

61
Q

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

A

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

62
Q

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.

A

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.

63
Q

___ ___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 ___ ___.

A

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.

64
Q

Temasek’s portfolio is highly ___ by geography.

A

Temasek’s portfolio is highly concentrated by geography.

65
Q

Temasek owns ___ stakes in companies that it holds

A

Temasek owns large stakes in companies that it holds

CAIA (39 decks)

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