SWFs’ Home Bias

Ashby Monk

Shai Bernstein, Josh Lerner, and Antoinette Schoar have just written a paper documenting a clear home bias in SWF investments. That institutional investors have a home bias in their equity investments is not a new idea. In fact, Coval and Moskowitz’ study of the mutual fund industry showed that managers can generate substantially higher returns from local investments (within 100 kilometres of fund headquarters) by exploiting informational advantages. However, Bernstein et al.’s paper suggests that SWFs’ local investments have nothing to do with generating higher returns (quite the opposite).

These authors offer up two competing interpretations for the home bias: 1) SWFs have a value function that includes more than just financial and commercial criteria–the social returns from SWF investments are important factors for SWF decision-makers; and 2) politicians are distorting investment decisions in favor of their own agendas, which may run counter to acheiving financial returns. The authors seem to find the second interpretation more compelling:

“SWFs where politicans are involved have a much greater likelihood of investing at home than those where external managers are involved.”

Moreover, they find that where politicians are involved, there is a much greater likelihood of worse performance. This is a result that also matches what we know about the pension fund world; immunizing the influence of politicians on pension plan investments is crucial for achieving target returns.

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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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