Q&A with Olivia Mitchell, Professor at The Wharton School of the University of Pennsylvania

By Ashby Monk

This blog is a source of open discussion and engagement on the topic of SWFs. As such, we welcome and indeed seek out all views and opinions on the subject. Today, we offer the seventh installment of what is now a routine segment: “Q&A with a SWF expert, stakeholder or policymaker”. We are pleased to welcome Professor Olivia S. Mitchell of the Pension Research Council and the Wharton School at the University of Pennsylvania. While Prof. Mitchell’s views are her own, her perspective helps to further debate and facilitate understanding.

Ashby Monk: Thanks for joining us today, Olivia. Can you briefly describe your interest in sovereign wealth funds (SWFs) and how they fit into your research program?

Olivia Mitchell: My research on SWFs grew out of my work on public sector pensions. One reason that governments have started to amass large asset pools held by and managed for the public sector is that they argue they are holding the assets in trust for the future. This sounded to me a lot like pensions, and indeed some countries do directly link today’s public saving patterns to tomorrow’s pension payments. This is occurring for instance, in Japan, Australia, and Chile. Nevertheless, we haven’t seen most SWF managers be very explicit about how these liabilities should and must affect investment patterns. Our paper forthcoming in the Journal of Pension Economics and Finances analyzes new information about ‘best practice’ management techniques for such publicly-managed investment pools.

Ashby Monk: How do you characterize the different types of publicly-managed asset pools out there?

Olivia Mitchell: Public investment funds are those pools of investible assets managed under the control of the public sector. In practice, these take three main forms: foreign exchange reserve funds held for stabilization purposes; sovereign wealth funds accumulated from natural resource taxes or fiscal surpluses; and public pension funds built up either through an explicit funded arrangement or the result of an excess of contributions over benefits during a demographic transition. Of late, however, the distinctions between these are blurring.

Ashby Monk: You’ve done quite a bit of research on the governance of financial institutions and specifically public pension funds. What are your views on the work being done by International Working Group on SWFs at the IMF?

Olivia Mitchell: There are many groups seeking to codify the ‘rules of engagement’ or governance practice of SWFs including the IMF, the OECD, and the World Bank, among others. This is valuable in that many of these public investment pools do not say much about their holdings or governance structure, a nontransparency justified on grounds that it preserves investment flexibility and protects business opportunities. On the other hand, this also means that taxpaying citizens (and researchers!) can glean little useful information about SWF asset allocation patterns. I would be even more impressed with the efforts of these international organizations if they could press the SWFs to acknowledge the liabilities they face and to manage more to these liabilities in an explicitly responsible manner.

Ashby Monk: I’m particularly interested in your work that discusses the relationship between governance practices and financial returns.

Olivia Mitchell: Our empirical analysis seeks to compare SWFs according to their governance, accountability, and investment practices, which we amalgamate into GAI scores. Governance refers to whether the fund avoids conflicts of interest, ensures autonomy from political intervention, and secures staff competence. Accountability asks about information communication and credibility, as well as process transparency. And the investment scores assess potential conflict of interests arising from possible market dominance. In the corporate world, there has been much work on how GAI type measures are linked to better private sector performance. But in the public sector context, there is a bit of research tying good management practice to better public sector pension performance, and essentially nothing on SWF performance. Indeed, most SWFs do not report either their investment allocations or returns, making it difficult to judge whether these public funds are invested for the public good.

Ashby Monk: What are the implications for SWFs? Is governance a problem for these funds, in your view?

Olivia Mitchell: We find some interesting links between GAI scores for several sovereign wealth funds and key indicators of national governance and political participation, human capital and business environment conditions, and demographic factors. In particular, the aged dependency ratio (population 65+/younger population) is a consistently important explanatory factor associated with good SWF management.  This suggests that nations subject to the most pressure from population aging are also those that pay most attention to SWF governance.  Another point I would make is that in these troubled financial times, financial protectionism is a grave worry, with a potential for worried politicians to blame SWFs for problems. Such concerns could be alleviated if these publicly-managed investment pools became more transparent, stated more clearly what their objectives are, and increased their financial accountability.

Ashby Monk: Thanks, Olivia, for taking time out of your busy schedule to chat with us today. This has been a fascinating discussion.

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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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