The Name Game – Defining Terms

by Ashby Monk

It is perhaps surprising that a generally accepted definition for sovereign wealth funds (SWF) does not exist, but the fact is that we still don’t know exactly what constitutes a SWF.

On the one hand, commentators such as Dr. Ted Truman argue that all large public financial institutions, even public pension funds such as CalPERS, should be included in a SWF definition (see footnote three of his recent policy paper). On the other hand, the pension funds that are caught up in Truman’s definition are quick to distinguish themselves from SWFs, for fear of getting caught up in any protectionist responses that SWFs might engender. For example, the Canada Pension Plan Investment Board has listed four main criteria that distinguish the CPPIB from SWFs more generally (see section IX). Indeed, even countries that by most definitions would be included as a sponsor of a SWF are claiming not to have one (i.e. see Putin’s remarks about Russia’s SWFs…or, rather, apparent lack thereof).

This ‘name game’ tension was also prevalent throughout our meetings in DC last week: some viewed the existence of an identifiable creditor as evidence of not being a SWF; some viewed high levels of accountability and transparency as proof of not being a SWF (which would suggest that the term SWF has already taken on a pejorative connotation akin to unaccountable or untransparent for certain individuals); and others still wondered whether we shouldn’t be including all state owned enterprises in any SWF defintion.

While my personal view holds that pension funds are not SWFs (pensions must invest in such a way that maximizes financial returns for retirees — anything else would be a breach of ficuciary duty and thus unethical), I do sympathize with some aspects of each of the above definitions. For example, public pension funds have been active in politics in the past. However, in my experience, even where public pension funds have been politically active (e.g. divestment strategies), in all cases they have justified their policies on the basis of financial returns (e.g. eliminating all Sudan related investments will improve the risk adjusted rate of return…). SWFs — to my knowledge — are not accountable in the same way (though they are by no means unaccountable).

In my view, SWFs are investment funds managed according to the interests and needs of the sponsoring government. As definitions go, this elicits the potential for political motivation in the investment decision but does not mean to suggest it is the driving or even primary goal — governments may be interested in, and in fact need, to invest SWF assets for commercial purposes!

But that’s just my view — we clearly need to spend more time evaluating the existing research and engaging in thoughtful discussion as to what a SWF is and is not…

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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