Archive for May, 2009

Checking in with the Academy

Ashby Monk

I’ve come across quite a few new academic papers on SWFs over the past few weeks. The following are those I have not yet already linked to (some may require subscriptions):

Inevitability and Necessity to Develop SWFs in China

Oil Funds: Perils and Opportunities

Who’s afraid of sovereign wealth funds?

‘Sleeping with the Enemy’ or ‘An Ounce of Prevention’: Sovereign Wealth Fund Investments and Market Instability

Islamic finance and sovereign wealth funds perspectives with focus on Shariah compliant transactions in India

Joint Funds

Ashby Monk

Opalesque flagged up an interesting article this morning in Emirates Business 24/7 on ‘joint funds’. In short, joint funds are cooperative investment funds that attract two or more SWFs into a new investment fund with a specific focus. The China Dubai Capital joint fund is listed as the primary example.

Whereas I rubbished the idea of mutual wealth funds that recently came to the fore, joint funds could offer considerable benefits. Unlike MWFs, which were presented as a way to facilitate SWF legitimacy and alleviate Western concerns about SWFs, joint funds are presented as institutionalized knowledge transfer. This transfer typically comes in the form of local information about investing in a specific region or industry. Since, past academic research by Coval and Moskowitz has shown that investing locally (within 100 kilometers of the fund’s headquarters) can bump investment returns by over 1% due to information asymmetries, there are clear benefits to having local partners.

In short, joint funds would bring together two or three funds with diverse backgrounds into a single cooperative, entity so as to maximize the effectiveness of the investment function in a specific economic geography (region, industry, asset class, etc.). I expect we’ll see more of these types of funds, since improving the investment function will also facilitate the acceptance of SWFs internationally. The partnership between Mubadala and France’s Strategic Investment Fund is perhaps illustrative of this fact.

When did France Fall in Love with SWFs?

Ashby Monk

Less than two years ago, France was leading the charge against sovereign wealth funds. Recall this statement by President Nicolas Sarkozy in 2007:

“We’ve decided not to let ourselves be sold down the river by speculative funds, by unscrupulous attitudes which do not meet the transparency criteria one is entitled to expect in a civilised world. It’s unacceptable and we have decided not to accept it.”

Things have changed. To begin, France is itself now a sponsor of a SWF. So, it clearly sees the benefit of state run financial institutions. However, given that the new French SWF was designed to thwart the influence of other, foreign SWFs over the French economy, this may not be the best signal that France has accepted the role of SWFs in the global community.

Nonetheless, some new evidence suggests this acceptance is forthcoming. France’s Minister of Economy, Industry and Employment, Christine Lagarde struck a tone recently that signaled a positive outlook about SWFs:

“Of course we welcome those investments. France is very much open to foreign direct investment. It is the second destination for FDI in the world after the United States. So it comes before the UK before Germany. It’s open…Foreign direct investments by sovereign funds are welcome. We’re not afraid. We don’t regard them as a threat.”

Lagarde is in the UAE to sign a cooperation agreement between the Strategic Investment Fund of France and Mubadala. Basically, the two will work together to make investments in France.

In short, it appears that France is comfortable with a model that sees foreign SWFs clubbing with the French SWF on French investments. So, in a matter of two years, France has gone from viewing SWFs as a threat to signing a deal that ensures foreign and domestic SWFs will be key players in France economy.

La France change d’avis comme de chemise…

Survey – Last Chance

Ashby Monk

This is your last chance to participate in the sovereign wealth fund survey co-sponsored by Oxford University and Pensions & Investments. If you have not already done so, please take 15 minutes to register your opinions and experience (just 37 quick questions).

Click here to proceed to survey website.

Sovereign wealth funds’ operations and strategies remain, in many cases, guarded secrets. This survey seeks to fill the information gap through proxy, by canvassing experts about their experience working with SWFs and their opinions on SWF operations. Until such a time that we have reliable, first-hand data, this may help us better understand these important financial institutions

Please forward this invitation on to colleagues whom you feel are also fit to respond. The main results of the survey will be published in Pensions & Investments in July.

Thank you!

GAO’s Second Report on SWFs

Ashby Monk

The GAO just released a new report entitled: “Sovereign Wealth Funds: Laws Limiting Foreign Investment Affect Certain U.S. Assets and Agencies Have Various Enforcement Processes.” This report seems to have two main objectives:  First, it examines the U.S. laws that affect foreign investment in the United States. Second, it evaluates which agencies enforce them and how they do it.

This report is worth reading; the impetus for producing it was clearly the 2007/2008 concerns many Washington policymakers had about SWFs’ activities. What is ironic then is the fact that the report details the extent to which many sensitive investments in the U.S. by foreign investors, including SWFs, were off limits well before the issue of SWFs cropped up. Will the fears that led to this report be muted by its release?

“…sectors with specific restrictions on foreign investments include transportation, communications, and energy. For example, foreign governments may not be issued radio communications licenses and foreign entities are not allowed to own or control more than 25 percent of the voting interest of any U.S. airline. In other cases, foreign investors can purchase companies or assets in a sector but face restrictions on their activities once they invest. For example, foreign companies can invest in U.S. banks, but if a company’s stake exceeds 25 percent or the company would control the bank, the company must receive prior approval and become regulated by banking regulators and would be limited in the types of nonbanking activities in which it can also invest. Foreign investors can generally invest in U.S. agricultural land, but must disclose purchases above certain thresholds to the Department of Agriculture (Agriculture). In addition, while not specifically a restriction on foreign investment, a recently strengthened U.S. law authorizes interagency reviews of certain foreign investments, potentially in any sector, for national security considerations. Most federal laws limiting foreign investment were put in place decades ago in response to national security or economic concerns at the time. GAO’s analysis of state-level restrictions on foreign investment indicated that some states had restrictions on foreign entities’ ability to invest in real estate, including agricultural land, and some had restrictions on foreign government ownership of insurance companies.”

Testing Times: Monitor’s Latest SWF Report

Ashby Monk

The Monitor Group’s Victoria Barbary and Edward Chin have just released a new report on SWFs in the Middle East and North Africa during the financial crisis. Coming in at 135 pages, this will keep the data starved SWF wonks (i.e. me) happy for a few hours. Some interesting blurbs below:

“The crisis exposed problems in how the funds manage risk and uncertainty. Many had never experienced a downturn and seemed ill-prepared to recognize signals of impending trouble or take effective action. This suggests a need to review or put in place improved sensing mechanisms, probabilistic assessment of potential outcomes, and actionable plans to limit damage and facilitate adaptation to changing circumstances.

To manage more effectively in uncertain times, funds may wish to re-examine their organization structures, human asset policies, information and intelligence systems, and approaches to managing risk and uncertainty.

Pressure to improve governance and accountability is rising. Sovereign government owners are seeking more accountability and appear to be pushing for shifts in portfolio composition by asset class, geography, and sector. Increasing external demands have encouraged more disclosure and peer oversight to take advantage of more favorable public opinion.”

Terengganu Investment Authority

Ashby Monk

The oil-rich sultanate Terengganu, within Malaysia, is raising money through the issuance of Islamic medium term notes to fund its new SWF: the Terengganu Investment Authority. Apparently, TIA already has some investments in mind:

“TIA chief executive officer and former executive partner at Accenture, Shahrol Halmi, said the fund had identified several strategic partners and would team up with well-known sovereign wealth funds for these projects, which include regional and international projects that have “positive spillover benefits” to the state.”

Governance issues plagued the process of setting up TIA, as both industry and government stakeholders worried about how such a large sum would be managed and governed. Significantly, it appears these governance issues have been resolved (or at least addressed):

TIA will “incorporate a triple-tier check and balance system comprising the board of directors (representatives from the three stakeholders who cannot hold positions in the Government or occupy any political positions), a board of advisers (to include “international eminent persons”) and a senior management team which will have a “mix of experienced, prominent local and international individuals”.”


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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