SWFs’ Changing Investment Behavior

Ashby Monk

Miracky et al. at Monitor Group have released another SWF report this week. As the title suggests, it has quite a bit of detail on SWF investment behavior. The data are drawn from various public and fee based services and are representative of Monitor’s more restrictive definition, which only picks up 31 funds (as opposed to, say, the 50+ funds tracked by SWF Institute). Still, it is well worth reading.

Of particular interest is the illustration of the shift in SWF investments from foreign back to domestic markets after the financial crisis. Using their data, we can see that around 18% of SWF investments were in domestic countries for 2006, 2007 and the first two quarters of 2008. In other words, 82% of SWF investments were heading out into foreign countries. This seems reasonable for a well diversified fund. However, once the financial crisis hit, the mix between foreign and domestic changed dramatically. For the last two quarters of 2008 and the first quarter of 2009, domestic investments jumped to roughly 40%. What drove this sudden increase of 22%?

Before speculating, it is important to note that these are investments in companies, so this shift does not reflect sponsoring governments using SWF assets for budgetary purposes during the financial crisis. Governments drawing down on SWF assets during the crisis is a separate issue. So this begs the question: why did these funds decide that domestic economies were suddenly more appealing than foreign markets? Was it based on commercial criteria (e.g. currency risks, ‘cheap’ assets, information asymmetries, etc.) or was it based on political criteria (saving jobs and bolstering domestic corporations).

I think in the case of SWFs there are good arguments to say that both would be legitimate. However, if the sponsoring government can tell the SWF to invest in domestic firms that are struggling (i.e. politicians engaging in stock picking), then these SWFs can’t claim to be purely commercial investors. So these statistics may create some concern among western policymakers, if only to raise suspicions that governments have more influence over SWF investment decision-making then they let on.

This issue is particularly toxic in the US. Take as an example the much derided investment by the State of Connecticut Pension Fund in the local firm, Colt Firearms, to save jobs at a politically precarious time. This specific investment has played a large role in preventing the establishment of a SWF to invest the US SSTF (and more generally has prevented any diversification of the SSTF). In short, the fear is that a US SWF would be vulnerable to political influence in times of political and economic crisis, which is seen as illegitimate.

So back to the sudden increase of domestic investments by SWFs during the crisis: Is this a case of politicians influencing SWF investments or a case of SWFs seeing great investment opportunities at home? I simply don’t know. And as I said before there are solid arguments for both being legit (this is after all government cash, not pension cash, so why not use it for the benefit of the country during times of crisis). But some may see this as evidence for political influence over SWF investment decisions. Greater transparency would help to alleviate such concerns.

8 Responses to “SWFs’ Changing Investment Behavior”


  1. 1 Rachel August 6, 2009 at 5:17 pm

    Ashby, interesting points. One other thing to throw in the mix – whether its that funds more focused on domestic investment that were the only ones receiving new funds. that certainly seems true in the case of Abu Dhabi.

    But ultimately to me it seems more important to think about how different funds fit in to the national investment strategy. that overall asset allocation has definitely shifted in recent months – it remains to be seen how the rest of the year will play out.

    either way the funds don’t seem to have purely financial interests at play, but that’s not necessarily a bad thing

  2. 2 Ashby Monk August 6, 2009 at 5:25 pm

    That’s a good point, Rachel. The sudden rise in domestic investments may indeed be more a function of which SWFs were getting new capital than about any dramatic change in investment policies. Cheers.

  3. 3 John August 12, 2009 at 4:29 pm

    Ashby, this is interesting. And once again you emphasise the deep antagonism towards SWFs being used for non-financial ends.

    But why is this? An SWF is an asset of the state, and surely a sovereign state is permitted to use all of its assets, financial or otherwise, to further its national objectives, financial or otherwise. If that means using one of its financial assets (eg its SWF) to achieve a non-financial objectives (eg protecting or shoring up a critical industry), why is that wrong?

    After all, it is apparently acceptable for western countries such as the US and the UK to use the financial resources of the state to rescue banks, insurance companies, car manufacturers and so on. The only difference is that they are doing so with borrowed money, and the only reason for that is that they do not have assets in a SWF to use instead.

    I don’t deny that people feel very strongly that SWFs should not be used for non-financial ends. I just don’t understand why not.

  4. 4 Ashby Monk August 13, 2009 at 2:40 pm

    Thanks for the comment, John. As I said above, I am sympathetic to your views. I guess GAAP Principle 19 is the reference point here. It states that the SWF should seek to max risk adj returns. BUT if the SWF decides not to do that, then it should be transparent about what it is up to (ESG? Bailout? etc.). So long as it discloses the underlying motivation, then its operations are within the GAAP even if they are political…

  5. 5 rien huizer August 20, 2009 at 8:15 am

    Perhaps we should figure out what we mean by legitimacy in the context of and SWF’s purpose (an instrument of neo mercantilism for instance), what would be legitimate sources (funds derived from (again neo mercantilist) currency manipulation probably not), what would be legitimate uses (probably bailing out the brother of the ruler’s bad investments is not), etc.

    Or we could simply say that any fund that adheres to GAPP is exists and operates legitimately. Trouble is, try to reconcile reality with an ambiguous code of conduct without enforcibility.. Just kiding.

  6. 6 Ashby Monk August 20, 2009 at 4:27 pm

    I think we’re talking about a two sided conception of legitimacy: purpose/objective and function/efficiency. Both sides are crucial for winning both domestic and international legitimacy.


  1. 1 GAAP Principle 19 « Oxford SWF Project Trackback on August 13, 2009 at 3:24 pm
  2. 2 SWF Performance in the ‘Great Recession’ « Oxford SWF Project Trackback on August 24, 2009 at 3:33 pm

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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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