SWF Volatility

Ashby Monk

Yesterday, I wrote that SWFs are perhaps better thought of as SwFs, since their wealth wasn’t matching up to previous estimates. Indeed, many of the analysts are today coming out with figures in the $1.5-2 trillion range, which is quite different from what we thought in early 2008. However, today I see a report out that says SWFs’ assets jumped in 2008 by 19% and are now around $3.9 trillion. What gives?

I’d rather not point fingers at any analyst, since the task of calculating SWF assets under management is a difficult one (secrecy and definitional inconsistencies present real challenges). Instead, this give me a chance to talk about an interesting paper I just read by Thomas J. Grennes entitled, “The Volatility of Sovereign Wealth Funds.”

In it, he makes a fervent case that a SWF’s size is inherently volatile. This is for two main reasons: First, the sources of revenue are extremely volatile. Second, “the portfolios of SWFs have also been affected by the current world recession that has diverted SWF investments from the international market to domestic spending in Russia, Norway, the Gulf States, and elsewhere.” In short, it is hard to predict how much money will be going into SWFs. It’s equally difficult to predict how the money will be invested, which in turn makes return assumptions hard to pin down.

So, assessing the current size of SWFs, and especially forecasting their size, is especially difficult; perhaps the hardest among all institutional investors. This is made clear by the recent divergence of estimates highlighted above.

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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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