Sovereign Funds in an International and Hungarian Context

Abstract: Sovereign funds are funds established and operated by the state. They came into the limelight after the financial crises of 2007-08, when they saved the most emblematic listed companies in the USA and Europe. The aim of the article is to explore some key issues related to sovereign funds. The paper discusses the origins of the term and some related economic concepts, including factors which resulted in the creation of sovereign funds. The legal background is also elaborated on both international and national levels, giving an insight to the regulatory framework. The article closes with propounding a sovereign fund in Hungary. This section gives an overview of state property management and its legal background.

I. Introduction

Sovereign wealth funds are investment funds created and operated by states or their national banks. The first time they came in the limelight was during the financial crises of 2007-2008 during which their intervention both in Europe and in the United States saved emblematic listed corporations from bankruptcy, much like a white knight would have done. Afterwards, sovereign wealth funds captivated the public’s mind again in 2016 as a special form of state-backed institutional investor. As of lately, sovereign wealth funds might be inclined to rearrange their portfolios, if the price of crude oil dropped and stayed at 30-40 USD continuously. In that case, state-backed investment funds may withdraw a staggering amount of capital – up to USD 404 billion – from the global securities markets. The reason is that state budgets might be in need of these funds to supplement the lost profits incurred from the low crude oil prices. On the other hand, the position of sovereign wealth funds could be drastically altered if Saudi-Arabia – with accordance to the market’s expectations – would finally create the largest fund ever, worth USD 2000 billion. This transaction would also mean sovereign funds gaining a 20% share of the global capital markets, which is worth around USD 30000 billion.

This topic raises relevant questions in Hungary as well. In light of the successes of the monetary policies of the Hungarian National Bank during the past two years resulted in the accumulation of significant financial reserves. A possible beneficial, and unprecedented in Hungary, utilisation of those reserves could be the creation of a sovereign wealth fund managed by the Hungarian National Bank.

Questions regarding the legal background of investment funds are fundamental. Yet, there is even more emphasis on regulatory framework in the case of sovereign wealth funds for two reasons. Firstly, their capital is sourced from public funds. Secondly, sovereign wealth funds are under the indirect control of the state, usually exercised through national banks.

In Hungary it is hard to properly outline the relations of the Central Bank, the state and the government only by relying on the legal provisions. The Hungarian National Bank is a stock corporation whose shares are owned by the state, as stipulated by Act CXXXIX of 2013, section 5, subsection 1, and thus exercises its right as a shareholder. According to section 1, subsection 1 of the Act, the government and other bodies cannot influence the activities of the Hungarian National Bank. Yet in turn, the state as the owner is represented by the minister responsible for the budget who happens to be a member of the government. Thus the government, albeit indirectly, but still exerts significant influence over the Central Bank. Regardless, certain organs of the Hungarian National Bank cannot be instructed directly. Under section 6 subsection 1 of the Act, significant decisions – such as ones relating to the alteration of the articles of association, or about other important issues – may be made in the name of the shareholders. Additionally, the chairman of the Hungarian National Bank is nominated by the Prime Minister, as stipulated by section 10, subsection 1 of the Act.

The chairman of the Hungarian National Bank has a duty to report both orally and in writing to the Parliament, under the Act CXXXIX of 2013, section 2 and section 131, subsections 1-2 and Section 9, subsection 4, point c refer the appointment of the members into the Monetary Council to the Parliament’s competence.

As sovereign wealth funds operate under the control of the central banks – realising their strategic goals – it becomes clear that governments and the state exerts influence over them. It would be grave mistake to misinterpret this influence as direct control though, as according to the relevant laws, states only have ownership rights.

This paper only wishes to answer some of the questions raised by sovereign funds. As we can see, the public law fundaments, the economic efficacy rooted in the capital markets laws, and the managerial issues stemming from company law reveals a wide-range of solutions in an international scale. It should not be ruled out, though, that there will be further questions regarding the management of sovereign wealth funds by the state which will need addressing later on.

The most interesting Hungary-related issue is that there is no legislation regarding sovereign wealth funds as of yet – unlike many other countries. Thus, Hungarian sovereign wealth funds founded in the future may only operate within the bounds rooted in public law and capital markets regulations on fund management, but there would be no concrete piece of legislation that would specify their special legal status or impose further legal criteria on their activities.

Additionally, an attempt is made at answering whether state ownership of sovereign wealth funds can be attuned to their institutional investor role. Also it is worth answering whether the interests of each differing nation-state – both in relation to investors and the target country – can be harmonised, and if yes, what would be the proper instrument for doing so?

II. Definition of sovereign wealth funds

In order to define sovereign wealth funds it is worth clarifying in what sense are they sovereign in the classic sense, and whether they fit the criteria for investment funds in light of the traditional institutional investor concept?

1. Are sovereign wealth funds truly sovereign?

The most accepted meaning of sovereignty is the state of not being subjected to the power of other person or group. Jean Bodin, French jurist, the father of sovereignty, claimed that sovereignty is simply the omnipotence of the ruler, which he called “sovereign”. Thomas Hobbes, English philosopher held similar views on the sovereign, in his words “the head of the state is the embodiment of the one and indivisible sovereignty”. John Austin, English jurist from the 19^th century defined sovereign as a person or a body which enjoys the subservience of the majority, furthermore is not subjected to other earthly powers. It is worth mentioning Carl Menger’s views on sovereignty, according to which a sovereign is someone who is able to enforce his will against the law, if necessary. From Menger’s definition, one can clearly see the trends of superseding the doctrine of state sovereignty. One of such trends was the concept of legal sovereignty which was laid out by Hugo Krabbe, a Dutch jurist. According to Krabbe, sovereignty is an impersonal potency emanating from the law. Thus, sovereignty lies in the public awareness based on the people’s willpower, and not on one person’s will, which in conclusion means the law is the true sovereign. Let us summarise what has been said so far with the thoughts of Antal Visegrády, in whose claims sovereignty is the sine qua non of state power, as it is the political and legal expression of power.

In light of the aforementioned it can be concluded that a sovereign wealth fund is not sovereign in the classical sense of the term. However, it goes without mentioning the ownership, control and monitoring rights are chiefly exercised by public organs representing the sovereign state. Legislative constraints of the state arising from membership in supranational organisations may influence legislation to a great degree as most of the laws and regulations are derived from supranational norms. One of such example would be the directive on Alternative Investment Fund Managers (2011/61/EU), which lays down the European framework for the operation of alternative investment funds. Compared to the directive, national laws cannot stipulate lesser criteria (e.g. capital requirements), thus the state cannot legislate within the widest accepted limits of sovereignty regarding sovereign wealth funds. In a sense, “sovereign wealth fund” is not exactly the most precise term, in the case of certain countries “state fund” would be a much more apt alternative.

However, the usage of the term becomes more clear if it is taken into account that it was originally used in the United States of America, which as a federative state was not exposed to the legislative trends dictated by supranational organisation, unlike the member states of the European Union.

Therefore, sovereignty in the context investment funds does not mean having more room for manoeuvre in contrast with other funds, more favourable regulatory environment, or extra guarantees by the state. That would absolutely go against the concept of free market. Sovereignty more likely means that such funds are chiefly for furthering the sovereign’s (the state in this case) economic agenda.

This study limits the meaning of sovereignty in the case of sovereign wealth funds to the framework laid out previously. The aim of the sovereign (e.g. the state) is to ensure the economic benefits for the overwhelming majority, or even fore the whole, society in the long run, which resulting from economic or fiscal policies. A sovereign wealth fund utilises the capital generated from the previously mentioned policies as an investment fund under market conditions (thus in a non-sovereign manner), and its gains are channelled back into the society by the sovereign operator itself.

2. In what sense is a sovereign fund an investment fund?

An investment fund is a financial instrument – a form of investment – which by utilising the benefits of pooled investment draws in capital publicly or privately. Investors by trusting their savings on professional asset managers basically purchase expertise. This expertise does indeed have a real price, which is the asset management fee. This fee is specified by the asset manager based on the value of the managed asset and the term of the asset management.

The asset manager in the case of activist funds changes its portfolio more frequently in a given term in contrast with a passive fund. Passive funds are generally following the stock market index or other complex financial indicators; thus they are copying their portfolio. This means passive funds are only adjusting their portfolios according to the changes made on the originals.

Collectively managed assets are utilising the benefits of both the economies of scale and portfolio diversification during their operation, so that the owners of the fund may not only invest in a wider range of instruments, but also gain access to financial instruments which otherwise would be inaccessible to them with less saving, while also maintaining a lower level of risk.

The assets of the investment funds are not only separated in the balance sheet of the asset manager, but it also becomes a different legal entity. This is one of the main differences between investment funds and portfolio-management mandates or consignment, as the fiduciary asset management takes the appearance of trust. A separate legal entity, the custodian is responsible for monitoring the investment activities. The custodian may veto any decision if it does not comply with the policies of the investment fund. In the clear majority of investment funds administrative and marketing are outsourced to third parties. The de facto separation of the assets guarantees the preservation of their investment in the future, ensuring their capital is in safe hands. Nevertheless, under no circumstances should it be taken a form of yield or capital guarantee, as the yield of the investment fund may change for the better of worse, depending on investment policies. The comparison of yields is aided by the annual yield calculation and the calculations of the net asset value.

An investment fund is thus suitable for the professional management of a specific, separated asset, providing the proper institutional guarantees for the original owner. From this point of view can we truly regard sovereign wealth funds as investment funds. The user rights are transferred to the investment fund manager in accordance with the investment policies. On the other hand, ownership rights are more restricted than in the case of trusts as they shall only be exercised on the asset classes defined by the investment policy. Thus, sovereign wealth funds operate more like fiduciary asset managers, as the sovereign utilises the fund for designated beneficiaries (i.e. future generations) unlike the owners of an investment fund who are mainly interested in realising their short or midterm goals.

Another important difference which requires special attention would be the activity of sovereign wealth funds. While most of the investment funds are passive, the state during the operation of the sovereign fund exercises its ownership rights actively. Meanwhile the shareholders of investment funds cannot even exercise their right to vote or to be represented, as their shares do not incorporate such rights. If the owners of the shares of the investment funds are dissatisfied with the management’s performance they may only resort to the Wall Street- rule, thus sell their stake in the fund. Because of this a sovereign wealth fund can only be operated as an investment fund if it is solely owned by the state. In this case the state must comply with the all the rules and regulations regarding investment funds and fund managers, which would constrain the handling of state assets, due to the complicated nature of it.

3. Definition of sovereign wealth funds

The term “sovereign wealth fund” was coined by Andrew Rozanov, an investment banker. He applied it on state funds which were created as a by-product of budgetary surpluses, due to the favourable macroeconomic, trade and fiscal balance, which were created by either long-term planning and austerity measures.

The International Working Group of Sovereign Funds (IWGSF), the most influential self-regulating group gives a much more simplistic definition. According to them, a sovereign wealth fund is a special investment fund over which the state disposes. The fund itself was created for macroeconomic purposes. A sovereign fund in order to fulfil its financial obligations operates state owned assets and executes financials strategies which include investment into foreign financial instruments.

Due to the above-mentioned difference in viewpoint it is well in order to create our own definition in order to examine sovereign funds within a unified conceptual framework. Therefore, a sovereign fund is a) managing state funds which are only available temporarily and in limited amount; b) achieves long-term goals of the national economy; c) either employs its own asset management organisation or an independent asset manager; d) mainly invests in foreign economies, chiefly in financial instruments; e) is an entity with separate legal personality which is subordinated under the ministry responsible for finances or the central bank of a given state.

From this point on the definition given above will be used for benchmarking the funds managed, the macroeconomic goals to be achieved, the legal and organisational form of achieving said goals and also the asset management and allocation strategies employed by the sovereign funds.

III. History of sovereign funds

The first sovereign funds fitting contemporary definitions came to be in the 1950s. The Kuwait Investment Authority (KIA) was inaugurated in 1953 in Kuwait, as the profit made by the state from selling oil exploded in a great degree. Because of that, to utilise the profit from the sale of oil in the long term a legal solution was created, according to which an asset management organisation (KIA) was to organise the sovereign funds of Kuwait – the Kuwait General Reserve Fund (GRF) and the Kuwait Future Generation Fund (FGF). 10 % of Kuwait yearly oil profit is channelled into the latter fund. By 2016 February the cumulative capital of both funds amounted to USD 593 billion. The importance of both funds in the national economy is underlined by the fact that the chairman of the board is the minister of finance, and the membership includes the minister of oil, the chairman of the central bank, the state secretary of the Ministry of Finance, and five independent experts. Three of them are working exclusively for the fund.

In 1956 in a small island state in the Pacific Ocean – Kiribati – the world’s second sovereign fund was formed, called the Kiribati Revenue Equalisation Fund. The purpose of the fund was ensuring the future generation would enjoy the profits of guano mining. The goal has been achieved as even though the mining of guano – used for producing phosphate – ceased a long time ago, the assets of the fund grew to USD 400 billion, of which 10 % revenue has increased the island’s budget about 16.5% of its GDP in 2008.

The next wave of establishing sovereign funds took place in the 1970s-1980s due to the two oil crises. Between 1973 and 1978 certain oil exporting countries saw a surge in their income as oil prices had increased fivefold. The oil price explosion was deemed unsustainable by the markets as the increase was the result of the collusion of OPEC states. Whereas in the early 2000s the soaring raw material prices were the driving force behind the creation of sovereign funds, after 2009 the financial crises gave new incentives for creating funds which were not based on raw materials, but capable of mitigating the effects of crises.

IV. The sources of capital for sovereign funds

There are four clearly distinguishable categories for the sources of capital for sovereign funds.

a) 

In the first place revenue generated from the production of raw materials can be identified. Besides the oil producer countries’ oil revenue, non-ferrous metals and diamonds also a prominent source of income these days, however, the aforementioned are not the only examples. An interesting anomaly that in the long run raw-material based growth may result in an economic recession, which is aptly illustrated by the detrimental phenomenon called “Dutch disease” which will be further elaborated later on. This shows the importance of proper management of budget surplus arising from the production and sale of materials, for example by setting up sovereign funds.

The importance of innovation – which is the fruit of human effort – cannot be stressed enough these days, as its significance is comparable to the natural resources. The innovation centres in California and Seattle, the Israeli economy – which was rebuilt on innovation – and the economic weight of the South Korean information and communication technology sector serve as a testament to the benefits of the expansion of economic sectors built upon innovation for a nation.

b)

Significant foreign currency reserves, usually resulting from a continuous positive trade balance invite a wonderful opportunity for initially capitalising of a sovereign fund for strategic purposes. For example, the Hungarian National Bank successfully managed its foreign currency reserves between 2012 and 2015 by setting much more realistic market value for the national currency than before. This resulted in the appreciation in HUF of previously allocated foreign currency reserves of the central bank which appeared in the balance sheet of the Hungarian National Bank as foreign exchange gains.

The surplus amassed this way could be utilised in more than one ways. One of those could be setting up one (or more) sovereign funds in Hungary. It is well-founded to consider more than one funds, as countries with more expertise in managing sovereign funds usually create at least two different investment funds – one of which trades domestically and the other which trades on foreign markets.

As foreign examples show, the vast majority of countries are not only using sovereign funds for managing the gains from the appreciation of foreign currency reserves, but also to manage them as well, since their intention is not just to utilise, but to accumulate. The foreign currency reserves. There are some exceptions though, as for countries with especially strong currencies – such as Switzerland – amassing foreign currency reserves results in the increase of deficit at the same time. We are currently witnessing a shift in paradigm, as central banks used to view foreign currency reserves as liquid assets, as of lately they are utilising them as investment instruments which in turn valorises their role.

c)

Financial resources, especially in years ending with positive balance, may also serve as the funds for sovereign funds. However, due to the short and midterm political cycles such occurrences are rare, and even they are only available for a very short time.

In China the real economic development and the markedly export-oriented economic model of the past 10 years resulted in grossly positive trade balance which in turn manifested in budget surplus. From this development in China stemmed many sovereign funds which would benefit the whole society even if the economic focus has turned to the domestic market.

Seemingly for Chinese fund managers, considerations for distinguishing between certain types of fund are less important; they operate plenty of hybrid – partially sovereign – funds which are exclusively focused on developing the domestic market, promoting growth in individual sectors and regions.

In China, an alternative solution to the problem of bad credit facilities amassed between 2008 and 2016 by the regional banks is the state increasing its share.

A markedly different counterexample would be practice of the USA following 2008, as President George Bush’s Troubled Assets Relief Program (TARP), which was a legislative package for saving banks, raised capital by directly gaining ownership instead of utilising sovereign funds. This was for furthering the political goals of the government as it tried to satisfy the electorate’s needs by giving a wider monitoring role for the state in banks involved in the financial crises of 2007-2009 concerning their activities.

In light of this it is quite an ironic turn of events that communist China tried to hold in hand a part of its financial sector through sovereign wealth funds, whereas the birthplace of financial market capitalism, the United States resorted to direct state ownership.

d)

The state can also expand a sovereign funds resources by rearranging its stock (and other securities) portfolio. Such instruments may be either transferred directly (for example by contribution in kind) or indirectly (the revenue from privatisation or concessions) to sovereign funds. Such measures allow for an extended period of time in which the benefits of extra funds can be realised.

A sovereign fund can not only diversify its capital by investing in short-dated instruments, but also by investing in long-term, equity type instruments as well. This in turn radically expands the sources of revenue, which is advantageous as low-risk financial instruments’ yield may not exceed the inflation rate. This may result in the erosion of the value of the financial instrument reserves. Such cases show the other advantage of sovereign funds: the possibility of diversification, as it not only makes it possible to obtain securities offered publicly, but also gives access to the securities offered privately. The potential investment portfolio may also be further expanded by alternative investments, such as non-domestically produced raw-material trade on the world market, foreign currencies, or ownership right on such portfolios.

V. Dutch disease

Dutch disease is an economic process taking place after revealing a large scale source of raw material and its exploitation – instead of the projected benefits – turns out to be detrimental for the national economy as the consideration paid for the raw material creates an immense buying pressure on the national currency. This complex economic correlation was observed in The Netherlands, after the revealing of the Gröningen gas site in 1959, which gave its name to this phenomenon after the resulting economic situation. The Dutch currency (the Dutch Gulden back then – NLG) due to the increased exports in oil temporarily spiked. The strong national currency raised costs for the agricultural sector and other industries which were mainly producing for the export markets as they were undertaking domestic investments. This in turn drove down the rate of export returns while also increasing wage-related costs in an international context; the increased currency costs also increased the expenses for the otherwise unchanged wages. Thus, moving production abroad becomes economically viable, as poorer countries have lower wage-related expenses. However, sovereign wealth funds can help curing the ails of Dutch disease. The yields of selling raw materials can be extracted from the short-term economic processes in the hopes of long-term increase, but at the same time it can also prevent the previously outlined effects.

The researchers of “resource curse” came to a similar conclusion as well. The focus of Jeffrey D. Sachs and Andrew M. Warner examination in the early 1990s was the seemingly logical correlation that the discovery of new raw material sources results in economic growth whereas in reality the contrary happens. In the1990 many economic analyses examined this trend and all of them came to the same conclusion: the sudden abundance in raw materials results in an economic growth even slower than before discovery. They also observed plenty of detrimental aftereffects in the case of examined countries. Among such were the proliferation of corruption, the growth of inflation and income disparity, and the shrinking of economic activities. Additionally, more cause of concern was that societal tensions were reaching the boiling point in the examined period which radicalise politics, fatally polarises the society resulting in a legal uncertainty. In light of that can we truly understand the curse moniker, as the expected growth turns into decline giving way to harmful social and economic tendencies.

As it was previously mentioned, in order to avoid the detrimental effects of layering recessionary trends sovereign funds provide an opportunity for strategically reallocating the revenue from raw material export. This not only prevents the unwanted appreciation of the national currency, but also extends the positive effects of economic growth. Besides, another extremely important benefit of operating sovereign funds must be emphasised as well on the society. Given that a sovereign fund is based on the ownership of the state the economic growth within can exert its benefits on a broader scale for the society than investment funds in private hands (e.g. hedge funds, private pension funds). This reasoning served the basis for setting up sovereign funds– amongst many others – such as the Kuwait Future Generation Fund, the State Oil Fund of Azerbaijan, the Australian Government Future Fund, the Government Pension Fund of Norway, and the Stabilisation Fund of Russian Federation.

VI. Aims of sovereign funds

1. Sovereign funds for stabilisation

The aim of sovereign funds for stabilisation is to divert assets during an economic boom for potentially recessionary periods during which they can provide resources for the state’s anticyclical policies without further raising national debt. Countries lacking natural resources – thus gravely in need of imports – may also use such funds for countering price hikes for raw materials. Otherwise, in such case the weakening economies of indebted countries may not be able to additionally finance their needs, or if they do, they may only be able to do it at an extra cost, deepening the crisis further more. This may result in the frequent and quick usage of reserves.

During the course of a crises the central bank may utilise monetary instruments, meanwhile state may utilise fiscal instruments to enact anticyclical policies, either directly or indirectly. Among the monetary instruments, the best-known indirect instrument is the series of interest rate cuts, which allows for more liquidity in the financial system, whereas the monetary authority may increase liquidity on the markets by directly purchasing securities.

In Hungary Act CXXXIX of 2013 on the central bank stipulates its competences. The highest level decision-making organ of the Hungarian National Bank is the Monetary Council. The Monetary Council decides on the bank rate. The council can be convened anytime, but its sessions are held on a monthly basis, and it is their competence to decide on the monetary policies and its execution. The board of the central bank is responsible for executing the monetary policies.

Solely such solution can only be accounted for as a quick win for acute liquidity problems. On the contrary, a state can only rely on budgetary reserves to effectuate long-term infrastructural investments in order to foster the demand for investments, to increase consumption and employment rate. The significant fluctuation in raw material prices may require intervention in the medium term, the investment period of such funds shorten due to the reasons listed above.

Wealth preservation and savings funds

The importance of savings funds can chiefly be appreciated by countries lacking in raw materials, or countries with climates which constrains agricultural production to smaller geographic area. The opportunities for setting up sovereign funds in the case of countries strongly dependent on the profits made on exporting goods mainly arise during periods when there is an increase in demand – and thus prices – for their products. Creating funds enables them to prepare for the lean years occurring as a result of the subsequent drop in the prices of products, raw materials or resources. Thus it is no coincidence that mainly countries exporting raw materials are the most motivated at accruing savings through sovereign funds. The exchange rate fluctuation itself draws attention to the necessity of creating reserves. In the case of fossil fuels volatility and accessibility are key factors, as the extraction rate of crude oil and natural gas varies depending on characteristics of the quarry site. Furthermore, the extractability of previously revealed oil and natural gas fields differs depending on their actual market price. This problem surfaced with shale gas revolution of 2015-2016, as in this period the price of crude oil plummeted from almost USD 100 due to the advances in extracting technology. Fracking made it economically viable to extract shale gas and shale oil from the hard to access geological formations found in the USA and Canada. However, oil prices below USD 50 and especially under USD 40 ceased the viability of such operation. The increased supply may stabilise oil prices on a lower level which in turn – due to the lack of reserves – may result in selling off shares of large oil corporation through Initial Public Offerings. This is akin to selling of the “family heirloom” as these sectors were owned privately by states (or national investors) keeping profits and controlling rights to themselves.

The above mentioned process started in Saudi-Arabia in 2016, as the privatisation of the national oil company was being prepared. Drawing the right consequences, Saudi-Arabia took measures to create the world’s greatest sovereign wealth fund by restructuring the financial instrument reserves of the transactions.

Within wealth preservation and savings funds two more subtypes can be differentiated. The first subtype would the inter-generation funds, which earmarks and invests – partially or wholly – the profits arising from successful (or in the case of Kiribati, fortuitous) economic factors for the benefit of future generation, preserving their yield. In this case, there are no constraints on utilising the fund, meaning disinvestments or further investments may be made according to the current state of the national budget.

The opposite would be the practice of non-generational funds (e.g. pension funds) which are indubitably targeted: their aim is to supplement the current pensions for the pensioners. The non-generational type also sets long term goals, but unlike generational funds they also undertake continuous payment obligations.

2. Funds for utilising foreign currency and gold reserves at higher yields

Each and every country – even without sovereign funds – have financial instruments for defending the national currency. The amount of protection they afford may be significant in spite of a country being deeply indebted. The foreign currency reserves are usually managed by the central banks. The expedience of planting responsibility of managing foreign currency reserves to central banks lies in the fact that they could utilise the reserves for shaping the exchange rate of the national currency, moreover, it makes it easier to handle international credit (e.g. repayment, changing currency, hedging currency risks with futures or swaps).

However, the limited diversification of currencies (whether in terms of reserves or debt) only helped a little with handling credit but it was not suitable for fostering long term economic interests. The Hungarian National Bank in the 1970s and 1980s founded its principles of handling currencies on a really simple idea: to become indebted in currencies with the currently lowest interest rates. This monetary policy, however, did not take it into account the currencies – based on the principle of interest rate parity – were strengthening significantly, which in turn boosted the outstanding debts of the debtor – in this case the Hungarian National Bank. The general populace and even businesses committed the same mistake before financial crises of 2007-2009, when they took out loans in foreign currencies – mostly in Swiss francs (CHF) – for which they paid dearly afterwards.

3. Development funds

Development funds are unique hybrid constructs which whilst show similar traits to sovereign funds, but they cannot be viewed as such in the narrow sense of the word. While they are funds in their name, but legally they simply mean earmarked reserves in the national budget, and not an entity with separate legal personality. In other words, these funds are not investment funds legally, thus they are not sovereign funds either.

However, much like sovereign funds, development funds are also fostering domestic economy through designated state resources. In order to do so, development funds are used for obtaining shares in commercial banks, founding regional development institutes, or buying stakes in companies providing state-backed loans. Afterwards in this framework, the operation of the aforementioned entities becomes analogous to a venture capital firm, providing refundable or non-refundable subsidies for businesses which are furthering goals of the national economy.

The most interesting case is when the state directly buys shares on a given country’s stock exchanges, as it happened in China and Japan in 2015 and 2016. An even bolder solution is obtaining the majority of shares of a stock exchange, which took place in Hungary in 2015. The operation of development funds is based on the same principles worldwide. They operate from state funds but without a portfolio based approach and also they are dominantly targeting domestic investments, as a result they cannot be regarded as sovereign wealth funds.

VII. The legal status of sovereign funds

The legal status of sovereign wealth funds can be derived from its relationship with the central banks and the competent ministry or ministries. The central bank managing the currency reserves and the competent ministry (for example the ministry of economy or ministry of finance) may either operate the sovereign fund separately from each other, or jointly, but it may also be feasible that a sovereign wealth fund is independent from both institutions and thus not assigned under any of them. From the aforementioned can be concluded that there are three different sort of organisational models for the activities of a sovereign fund.

a)

The largest degree of independence is provided by operating as a separate legal entity, for example as a joint stock corporation wholly owned by the state. In this case the state exercises its ownership through the competent ministry (e.g. ministry of finance). Such companies are usually incorporated under the laws of the founding country; thus they are governed by their domestic company law. A great example for such sort of sovereign funds is provided by Singapore, where the GIC Private Limited (Government of Singapore Investment Corporation Private Limited) operates as private company, the sole owner being the state of Singapore.

b)

Sovereign funds created and operating as public entities are not incorporated under civil law or company law provisions, they are generally constituted by separate legal norms within the competence of a state organisation, or they are operating as independent organs of that state. These kind of sovereign funds are atypical for developed countries, they are more likely to appear in developing countries, especially in those which are heavily reliant on crude oil exports. A good example would be the Kuwait Investment Authority (KIA), which was constituted by Act 47 of Kuwait and its activities are regulated by the same act.

c)

Sovereign funds could be the sub-units of public bodies, however, in this case they are only managing certain assets of the state or the central bank. Under this circumstance their room for manoeuvre is the most limited, as the central bank or the competent ministry exercises direct control over their activities, either separately or jointly – depending on the legal framework. As such funds do not have separate legal personalities, rights and obligations to be enforced are counted as claims made against the central bank or state organs. On the other hand, the state or the central bank make investments or manage assets directly through such funds. Thus, it can be concluded that these sort of funds do not count as investment funds in the narrow sense of the word, they act more as an apparatus for allocating resources in the national economy. An example for these kind of funds would be the sovereign fund of Norway, the Norway’s Government Pension Fund Global. The Norwegian sovereign fund is managed by the asset management department of the central bank (Norges Bank Investment Management – NBIM), mandated by the ministry of finance.

The aforementioned outlines the dual status of sovereign funds. While the ownership of the state is clearly demonstrated in all three cases, however, it varies greatly. Nevertheless, asset management funds constituted by public law appeared on the market for institutional investors as mostly operating as separate legal entities. Due to their volume and the strategies employed by sovereign funds their relationship with the founding state and the target state may become extremely sensitive. For this reason, it is important to make note of that target countries may resist against investments made into sensitive sectors, and their defensive actions could be powerful and manifold. The most interesting aspect is whether developed countries have become prepared enough for such challenges, given the events of the past 10 years. The strategic sectors of the United States were taken by surprise when China gained significant share in them after the financial crises of 2007-2009. That is why developed countries made laws for defending sensitive sectors, citing investor protection and the security of national interests.

As an example for the above mentioned it is worth having a look at the creation of the Foreign Investment and National Security Act of 2007, which came into force in 23^rd January 2008 under the Executive Act Nr. 13456 of George Bush. This act amended section 721 of the Defense Production Act of 1950. Under the previous regulation gaining ownership of foreigners was permitted even without the formal investigation of Committee on Foreign Investments (CFIUS) – a committee specifically established for such purpose. Much to the consternation of the general public in the United States, Dubai Ports International – DP World, a company managing ports in the Middle East, took over an English public limited company thus gaining the management rights over the most important ports on the East Coast. Due to the outrage experienced in the United States DP World sold the management rights of the ports to a corporation seated in the United States.

It is also worth examining the international recommendations on sovereign funds, during which the Santiago principles will also be covered, including their content and the goals they prescribe.

VIII. The Santiago Principles

The International Working Group of Sovereign Funds – IWG for short – was inaugurated between 30^th April and 1^st May 2008, holding its first session in Washington DC, USA. The third session was held in Santiago de Chile where the principles and practical considerations held to be fit for the purposes of the activities of sovereign funds were passed by all 28 countries which were represented in the working group.

The recommendations were passed by the working group under the name “Sovereign Funds Generally Accepted Principles and Practices” or in short “Santiago Principles” in 2008 October.

The Santiago Principles consists of 24 recommendations, out of which two examples should be highlighted as they are the most relevant for the topic at hand.

According to GAPP 16. Principle “The governance framework and objectives, as well as the manner in which the sovereign wealth fund’s management is operationally independent from the owner, should be publicly disclosed.” A good example for a well laid-out corporate governance system would be the Koran Investment Corporation (KIC). In the case of KIC a two-tier governance system can be identified. The main decision-making organ the Steering Committee consists of 9 members. Six outsider (independent) members are appointed from the business sphere by the Civil Member Candidate Nomination Committee for a 2 years long term alongside with the representative of the Ministry of Strategy and Finances, the chairman of the Central Bank of Korea and the CEO of KIC. The competence of the Steering Committee includes setting the long term strategic goals and deciding on the most important economic, legal and staffing matters. Moreover, its competence includes the amendment of the articles of association, determining the short and medium term investment policies, also includes the power to decide on raising capital or the approval of the annual accounts.

According to GAPP 18. Principle “The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.” A good example for sound and transparent portfolio management would be the role of Investment Advisory Board (IAB) in the practice of The Petroleum Fund of Timor-Leste. The IAB was established under article 16 of Petroleum Fund Law (Law No. 9/2005). The board gives strategic advice to the Ministry of Finance and the Ministry of Planning and Investment Strategy regarding the transactions of this oil fund. Part of the consultancy includes setting risk-adjusted benchmarks for the ministers making the performance of the fund comparable. The IAB also sets up guidelines regarding the investment consultants appointed under article 12 of the Petroleum Law which give advice to the aforementioned ministries. That includes advising the Minister of Planning and Investment on evaluating the performance of the consultants and also on appointing or acquitting them. Moreover, the IAB advises the minister on revising the general investment strategy.

IX. The legal status of sovereign funds in Hungary

As of yet in Hungary there have been no sovereign funds or any piece of legislation which prescribed the establishment or the inner workings of any sort organisation operated as sovereign funds. Nonetheless, new asset management forms emerged in practice which, in spite of all the differences, are showing similarities to sovereign wealth funds.

Such were the organisations set up privatising state owned assets in the 1990s (e.g. State Asset Agency – Állami Vagyonügynökség, ÁVÜ; National Privatisation and Asset Management Ltd – Állami Privatizációs és Vagyonkezelõ Rt., ÁPV Rt.), investment funds (e.g. OTP EMDA Derivative Fund and the OTP Supra derivative funds), alternative investment fund manager companies (e.g. Plotinus NyRt), and companies specialised on fiduciary asset management (e.g. Concorde ZRt.). In the aforementioned institutions one may find the characteristics of sovereign funds.

Act LIV of 1992 contained provisions on the sale, utilisation and maintenance of assets in the temporary ownership of the state. The main aim of the act was to regulate the sale of state assets. For this purpose the act established the State Asset Agency. The Agency, as a financial body exercised the ownership of the state. The actual asset management activities of the Agency were outlined by the Asset Management Directives, which was a Parliament Resolution adopted in 1992 under section 18 subsection 1 of Act LIV of 1992. Interestingly, under section 3.2. of the Directives the Agency was permitted to assign the temporarily owned state assets into investment funds or portfolio packages, however, such activity was only allowed in the case of privatisation. Although only assets in the temporary ownership of the state were subject to asset management activities, the example was set for an asset management through financial bodies. This activity was linked to the annual budget via further regulations on a yearly basis which served as a reason for jointly hearing both matters.

Contrary to its name, Act XXIX of 1995 on the sale of state owned entrepreneurial assets not only covered temporarily owned state assets, but also regulated permanently owned state assets as well. This act established the National Privatisation and Asset Manager Ltd. which exercised the state’s ownership rights during the sale of temporarily owned state assets and also during managing the permanently owned assets too.

Act CIV. of 2007 on national assets is interesting for two reasons. On one hand, the act declared the end of institutional privatisation, thus the main goal of the regulation was set as the permanent asset management. That served as the reason behind redefining national assets, which limited the scope of the act to assets managed permanently by the state. On the other hand, the act established another asset management corporation, the Hungarian National Asset Management Ltd.

This act aimed at establishing a new, contemporary framework of managing state owned assets. As a part of that, the act defined the Hungarian National Asset Management Ltd as a private limited company wholly owned by the state and it stipulated detailed organisational and operational regulations. While technically the act prescribed the management of state owned assets, this act specified shares as concrete financial instruments, which were in the ownership of the state. Yet, judging by the content of the act’s provision, they were more about operating state owned assets rather than management in the narrow sense of the word.

A novelty of Act CXCIV of 2011 on national assets was aiming at “providing for the needs of future generations.” The act itself specifies many asset management organisations. However, almost without an exception those had been managing state owned assets previously, as the list included state- or council owned companies, financial bodies or companies wholly owned by either of them. The only exception to that rule were the new asset management form established by the new definition of asset manager. Because under section 3, point 19, sub point ag of the act enables the individual appointment of an asset manager legal person under the authorisation of an act. That opened up the opportunity for mandating a partially state owned or privately owned company for managing state assets. That in turn enables the often employed practice of sovereign funds, namely mandating more independently working asset managers. The management and utilisation of state owned assets emphasises the operation and preservation once again, however, the act makes no mention of financial instrument. Yet section 16 of the Act specifies the utilisation and management of special assets governed by other acts for the benefit of future generations.

Further legal analysis of the activities of central banks and asset managers reveals even more opportunities. Section 4 point 55 of Act CXXXVIII of 2007 on Investment Firms and Commodities Dealers, and on Regulations Governing their Activities defines portfolio management with no regard to the type of client. Section 48, subsection 3 specifies the Hungarian National Bank among the professional clients as a preferential institution. Thus the person authorised for managing portfolios could be instructed by the central bank under the provisions of this act. On the other hand, it would give rise to conflict of interest between the two institutions as the central bank under section 4, subsection 9 of Act CXXIX of 2013 also serves as the monitoring agency of the financial intermediaries, which in turn would result in paradoxical situation of not only being the principal of the financial institution, but also supervising it as an authority at the same time. Yet Act CXXXVIII of 2007 provides an example for the legislature by enabling the central bank to act as an authority for reorganisation under the provisions of another act.

The overview of laws regarding on the management of state owned assets outlined above excellently demonstrates that – although in a rather disorganised way – there would be an opportunity for establishing sovereign wealth funds as legal constructs for managing financial instruments of the state. However, to enhance its consistent nature the currently existing laws need to be further expanded and amended systematically. While it is less of a pressing issue in terms of launching sovereign wealth funds, but it gets more urgent when it comes to their activities, as the aforementioned clearly demonstrates current state of the Hungarian legal system, leaving a lot to desire in this aspect as most of the deficiencies arise in these matters.

The most important conclusion would be that the aforementioned legal forms only by themselves might be suitable, but under no circumstances would be ideal for serving as the framework for the activities of a sovereign fund. From this aspect it would be more appropriate to create a dedicated legal form. In these special issues particular legal provisions would also be suitable even if the sovereign wealth fund was to be operated as company wholly owned by the state. This solution would be an exception even in contrast with the practices of other countries, as it would be much harder to articulate the interests of the state, both in terms of control and monitoring. It is no coincidence that only one sovereign fund chose the seemingly the simplest solution for operating a sovereign wealth fund as a private company, which would be the previously mentioned Government of Singapore Investment Corporation Private Limited.

X. Conclusion

During the course of examining the state ownership aspects of sovereign funds raised the question of compatibility between the institutional investor role of the sovereign funds and the interests of the target countries, with regards to the matters of compliance.

It can be concluded that such issues took by surprise the legislature of developed target countries, they are yet to ban sovereign funds from other countries. Instead, they still rely on the self-regulating market forces and their answer to the challenge was adopting the recommendations of the Santiago Principles.

In light of the aforementioned the question must be raised: would it be expedient to establish a sovereign wealth fund in Hungary? The answer is a certain yet. The funds are already available, as the central bank amassed significant profits from the devaluation of the forint. Also, characteristics much akin to the operation of sovereign funds can also be observed in the current investment strategy of the Hungarian National Bank.

In our view, all of this could be realised in the short or medium term with careful preparations and the right intention of the legislature. An independent asset management body managing the currency reserves could start its operations with an initial capital of billions of USD. Sovereign funds employing sound investment strategies, multi-level portfolio management (see: the practice of GIC funds of Singapore), corporate governance (the organisational structure of South Korea’s KIC), competent experts and the involvement of outsider asset management are able to create wealth in the long term. This would contribute to the well-being of future generations and the realisation of long term national strategic goals.

A mean of that could be the canalisation of funds into the currents of international securities markets through that certain phenomena – even recessions – could be used for creating profit. One must always bear in mind that legal environment of the target countries must always be observed.

References

¹ Investment funds are institutional investors which manages the savings of private and institutional investors alike divided under the portfolio principle. The fund manager’s investment policy is monitored by independent custodians to ensure investments are carried out in the proper instruments while observing the investment asset class limits.

² A white knight during the course of a hostile takeover is a friendly company’s helping hand against hostile company, (also called as black knight) by frustrating their transaction. Usually the target company’s management remains afterwards.

³ Institutional investors are asset managing financial institutions which solely focus on acquisitioning other’s assets and savings. This category includes mutual funds, pension funds, life insurance companies, but also hedge funds, ETFs and private equity companies as well.

⁴ A portfolio is the division of a managed pool of assets utilising more instruments, thus containing the risks of each instrument. A portfolio divided into more instruments does not guarantee against losses, but it can mitigate high levels of risk to an average level of systemic risk – market, sectoral or other.

⁵ http://www.portfolio.hu/finanszirozas/bajban_az_olajnagyhatalmak_repul_a_csaladi_ezust.227586.html (2017.11.11.)

⁶ http://www.bloomberg.com/news/articles/2016-04-01/saudi-arabia-plans-2-trillion-megafund-to-dwarf-all-its-rivals (2017.11.12.)

⁷ The operating profit of the Hungarian National Bank in 2013 was 26.3 billion forints, while the operating profit arising from the changes in the currency exchange rate was HUF 200.3 billion. In 2014 the operating profit of the Hungarian National Bank reached HUF 27.4 billion and profit made on the exchange rate reached HUF 511 billion. In 2015 the operating profit was HUF 95 billion out of which HUF 50 billion was paid in dividends to the national budget. After paying dividends the retained earnings of the central bank decreased to HUF 108 billion.

⁸ See: Visegrády A., A jog- és állambölcselet alapjai. Dialóg-Campus Kiadó, Budapest-Pécs, 2001.pp 229–232.

⁹ See: Visegrády, ibid, pp 229–232.

¹⁰ See Bix, B., John Austin in Stanford Encyclopedia of Philosophy, Stanford University 2006. Accessible at: http://plato.stanford.edu/

¹¹ Carl Menger (1840-1921) economist, founding figure of the Austrian school.

¹² See: Visegrády, ibid., pp 229–232.

¹³ See: Visegrády, ibid., pp 232.

¹⁴ Economies of scale means that if an instrument reaches a certain size it makes it economically viable to deal with. In terms of investments it is when the accumulated wealth reaches a certain amount which gives access to a larger variety and quantity of instruments to invest in; for example it becomes viable to obtain real estate or utilising commercial real estate. The large target asset further diminishes the unit costs while also serving an entry point.

¹⁵ Calculating annual yield is similar to calculating interest rates of deposits as the yields of the funds are specified on 365 days long annual basis. That way the costs can be determined annually or pro rata (e.g. money market funds) making the performance of the funds comparable with each other.

¹⁶ Net asset value equals to the value of liabilities subtracted from the value of assets in a portfolio. It is normally determined per share, meaning the previous value must be divided by the number of shares outstanding.

¹⁷ Andrew Rozanov, investment banker. He was employed by Union Bank of Switzerland (UBS), and State Street Advisors, specialising in institutional investors. Currently he serves as the CEO of Permal Advisory Group advising instututional investor clients on long term portfolio building, risk management, alternative investments, and tail-risk mitigation.

¹⁸ See Rozanov, A., Who Holds the Wealth of Nations? Central Banking Journal, May 2005 see also: https://web.archive.org/web/20080529122341/http://www.ssga.com/library/esps/Who_Holds_Wealth_of_Nations_Andrew_Rozanov_8.15.05REVCCRI1145995576.pdf 1.old. (2017.11.12)

¹⁹ International Working Group of Sovereign Funds – IWGSF was founded in 2008 adopting the Santiago Principles. The aim of the group is to foster cooperation and to share best practices and examples of corporate governance. See http://www.ifswf.org/ (2016.05.11.)

²⁰ For example, the profits made on raw materials in a period of time, during which the market price rises above the mean price of decades, or currency reserves amassed on profits made on exports ramping up in certain sectors of the industry or one-time profits made from the utilisation of certain state assets (concessions, privatisation, etc).

²¹ A good example for funds linked to a non-sovereign state would be the Texas Permanent Fund. It was established in 1854 with an initial capital of USD 2 million. In 2016 the amount of capital managed by the fund reached USD 34.5 billion. As it is founded on the oil revenue of Texas state, it cannot be regarded as a sovereign fund since Texas is a member state of the USA since 1845.

²² National oil revenues are channelled into this fund (GRF). In 1976 half of its assets were transferred to another fund(FGF) and also 10 % of the oil revenues is channelled through the fund to the Kuwait Future Generation Fund. Withdrawing assets from the fund is decided annually.

²³ The fund was established in 1976 to manage foreign instruments.

²⁴ See http://www.kia.gov.kw/en/ABOUTKIA/Pages/GRF.aspx (2016.05.14.)

²⁵ According to Article 3 of Act 42 of 1982 it consists of 5 independent members, 3 out of them shall not hold another state office. All members are appointed for 4 years by Amiri Decree.

²⁶ http://www.economist.com/node/10533428 (2016.05.14.)

²⁷ http://www.economist.com/node/10533428 (2016.05.14.)

²⁸ The first oil crises started in 1973 October with the OPEC embargo, which exploded the price of crude oil from 3 USD to 12 US by the end of the embargo in March 1974. The reason was the Yom Kippur War, in which Egypt and Syria launched airstrikes against Israel. Within 6 days the US started aiding the Israeli war effort with weapons which resulted in the OPEC embargo. The 2nd oil crises of 1979 was triggered by the revolution in Iran. World oil production only dropped by 4%, but the price of crude oil doubled within a year, peaking at 39.5 USD. Afterwards a 20 years long descent happened in price of oil.

²⁹ The Organization of the Petroleum Exporting Countries – OPEC is an NGO founded in 1960 in Vienna by five countries (Iran, Iraq, Kuwait, Saudi-Arabia and Venezuela) in order to unify and coordinate the oil policies of member states. Currently the organisation has 13 member states, as the following countries joined: Algeria, Angola, Ecuador, Indonesia, Libya, Nigeria, Qatar and United Arab Emirates. The organisation controls over 50% of the world’s oil reserves, yet their share in production does not reach 50%.

³⁰ Money market instruments are kind of financial instruments which expire within a year. The market for financial instruments is complimented by capital markets, which serves as a trading platform for instruments expiring over a year.

³¹ The rules of private offering constrain the underwriting or the reception of securities to a smaller circle of investors. Usually, with no respect to the nature of a private offering, such transactions may occur at a limited value and headcount. By specifying a smaller circle of investors, the volume of funds to be allocated decreases at the same time, while also limiting their reporting obligation to the public.

³² Alternative investments are financial instruments excluding the conventional share, bond or cash-type instruments. This category consists of resources, foreign currencies, commercial properties, but also hedge funds, venture capital firms and even pieces of art.

³³ A good example for the contradictory economic effects of short term enrichment would be the effects of gold brought home by Spanish conquistadors.

³⁴ Export return rate is a percentage which compares the yields from export defined in national currencies to the invested base unit.

³⁵ A similar process took place in Great Britain during the 1970s after revealing the oil field in the Northern Sea. The British economy became a net oil exporter which overvalued the national currency and the economy sank into recession with an increasing inflation rate.

³⁶ Jeffrey Sachs (1954- ) American economist. He obtained his MA and PhD degrees at Harvard College. He became the professor of Harvard University as young as 28 years old. Throughout his research he tackled issues of globalisation, the correlation between commerce and economic growth, macroeconomic policies, and the problems of sustainable growth. He served as an advisor the International Monetary Fund (IMF) aiding the transition of former Eastern Bloc countries from planned economies to free market economies.

³⁷ Sachs, J. D., Warner, A, M., Natural Resource Abundance and Economic Growth National Bureau of Economic Research Working paper 5398 December 1995. See http://www.nber.org/papers/w5398.pdf 21-23 old. (2016.05.15)

³⁸ http://web.stanford.edu/group/tllep/cgi-bin/wordpress/wp-content/uploads/2013/10/Timor-Leste-Petroleum-Fund-Law.pdf 8–9. old. (2016.05.15)

³⁹ The anticyclical economic policy is aimed at triggering effects going contrary to the economic cycle to dampen its impact. Especially during times of recession it becomes important to employ such measures. In an overheated economy state intervention is important for reducing the size and the impact of the economic bubble.

⁴⁰ Act CXXXIX of 2013 section 46.

⁴¹ Act CXXXIX of 2013 section 11. The base rate is 0,9 % – effective from May 24, 2016.

⁴² Act CXXXIX of 2013 section 46. subsection 2

⁴³ Act CXXXIX of 2013 section 49. subsection 1

⁴⁴ Fossile fuel carriers are coal, oil and natural gas, which are only available in limited quantity. The currently known reserves with the currently available technologies are not enough to keep up with the demand in the 21st century. As they developed during the course of millions of years the chances of renewal are slim to none. Even if it happened, the Earth would suffer similar climate changes as the ones occurred during the creation of such reserves.

⁴⁵ Volatility defines the severity of exchange rate fluctuations. This amplitude shows how sensitive an instrument is to the changes in the market.

⁴⁶ http://www.bloomberg.com/news/articles/2016-04-01/saudi-arabia-plans-2-trillion-megafund-to-dwarf-all-its-rivals (2017.11.15.)

⁴⁷ http://www.penzriport.hu/letoltes/Magyar_allamadossag_keletkezese_1973_1989.pdf. 20-21 old. (2016.05.15.)

⁴⁸ Interest rate parity is the difference between the prompt exchange rate of two currencies and difference in their interest rate. It is used for determining the foreign exchange futures.

⁴⁹ Government of Singapore Investment Corporation Private Limited was established in 1981 to manage the Singaporean Governments’ currency reserves.

^5§ Article 1 of the act prescribes the establishment of an independent authority named „Kuwait Investment Authority” directly linked to the Ministry of Finance. It is seated in Kuwait, but also has offices abroad. See: ww.kia.gov.kw/en/Pages/KIALaw.aspx (2016.05.16)

⁵¹ Norges Bank Investment Management – NBIM is the Norwegian central bank’s asset management organisation, which operates the Norwegian oil fund, The Government Pension Fund Global-t (GPFG) and manages the foreign currency reserves since its establishment in 1998.

⁵² See Lee, Y. C. L., The Governance of Contemporary Sovereign Wealth Funds. Hastings Business Law Journal 2010/1 p 209.

⁵³ See Lee, ibid. p 204

⁵⁴ See Lee, ibid., p 204.

⁵⁵ The company is owned by the United Arab Emirates.

⁵⁶ The Peninsular and Oriental Steam Navigation Company operates numerous ports on the East Coast of USA (New York, New Jersey, Philadelpia, Baltimore, New Orleans, Miami).

⁵⁷ Countries with representation in the working group: Australia, Azerbaijan, Bahrein, Botswana, Canada, Chile, China, Equatorial Guinea, Iran, Ireland, South-Korea, Kuwait, Libya, Mexico, New-Zeeland, Norway, Qatar, Russia, Singapore, Timor-Leste, Trinidad and Tobago, United Arab Emirates and the USA. The following countries and entities are taking part as permanent observers: Omáa, Saudi-Arabia, Vietnam, OECD and the World Bank.

⁵⁸ Korean Investment Corporation (KIC) was established in 2005-ben in order to manage assets trusted on them by the government of South Korea to foster growth in domestic financial markets, and to encourage foreign investments by offering co-investment opportunities.

⁵⁹ ARTICLE 11 (QUALIFICATIONS FOR CIVIL MEMBER)

(1) A Civil Member shall have any of the following qualifications:

A person who is employed at a university or research institute and whose research experience in finance or investment is more than ten years;

A person with more than ten-year experience in investment at international financial organizations or domestic/overseas financial institutions of more than a certain size set forth by the Presidential Decree; or

An attorney-at-law or a certified public accountant with more than ten-year experience in finance, investment or company audit.

(2) A former officer or an employee of the Corporation may not be able to become a Civil Member within three years after leaving his position.

(3) An officer or an employee whose institution has been entrusted asset from the Corporation may not become a Civil Member.

⁶⁰ http://www.ifswf.org/sites/default/files/SantiagoP15CaseStudies1_0.pdf 18. old (2016.04.01.).

⁶¹ Benchmarks enable the quantification of certain activities (such as fund management, production, services). By using percentages to set benchmarks enables enterprises to compare their activities in a sectoral or temporal dimension of comparable enterprises. A good example would the stock exhange indices, such as DAX, MSCI World Index, but also inflation rate or GDP and GNP.

⁶² Act LIV of 1992 chapter II.

⁶³ Act LIV of 1992 section 5.

⁶⁴ Parliament Resolution 71 of 1992. (XI. 6.) on Asset Management Directives of 1992.

⁶⁵ Such instruments mean the shares the state owns in companies.

⁶⁶ Act CVI of 1992 section 8 subsection 1.

⁶⁷ Act XXIX of 1995 section 7.

⁶⁸ Act XXIX of 1995 section 1. subsection 3.

⁶⁹ Institutional privatisation took place in a large volume and at a planned pace contrary to spontaneous privatisation between 1989 and 1992, which happened ad hoc, utilising the loopholes in the current regulatory frameworks.

⁷⁰ Act CIV of 2007 chapter III.

⁷¹ Act CIV of 2007 section 18.

⁷² Act CIV of 2007 section 1 subsection 2 points c and e.

⁷³ The difference between operating and managing assets is signficant. While both activities are carried out in a portfolio viewpoint, but the former implies passive management, the latter entails active participation, which inlcudes the sale and purchase or swapping of certain elements of the asset with a tight deadline either as a sale or other legal grounds.

⁷⁴ Act CXCIV of 2011 section 3 point 19.

⁷⁵ Act CXXIX of 2013 section 4 subsection 8.

⁷⁶ An authority of reorganisation is a financial institution which disposes of appointing liquidators to companies of special importance to the national economies and decides in certain issues regarding the liquidation process.

⁷⁷ See http://www.portfolio.hu/vallalatok/matolcsyek_beszalltak_a_teslaba_is.232565.html (2016.05.14.)

⁷⁸ In the case of KIC one may identify a two-tier governance system. The highest level decision making organ, the Steering consists of nine members. Six members are nominated by the Civil Member Candidate Nomination Committee from the business sphere for a two-year term. The committee also consists of the Ministry of Strategy and Finance, the chairman of the Central Bank of Korea, and the CEO of KIC. The competence of the Steering Committee includes setting the long term strategic goals and deciding on the most important economic, legal and staffing matters. Moreover, its competence includes the amendment of the articles of association, determining the short and medium term investment policies, also includes the power to decide on raising capital or the approval of the balance sheets. The Investment and Risk Management Subcommittee aids the Steering Committee regarding questions of medium and long term investment strategy. The Steering Committee is also aided by the Budget Deliberation Subcommittee and Compensation Subcommittee in matters of perfomance evaluation.

Dr. habil. Kecskés András PhD
Associate Professor, Head of Department
University of Pécs, Faculty of Law, Department of Business and Commercial Law