Are States Good Investors?

Ashby Monk

Bernardo Bortolotti, Veljko Fotak, William L. Megginson and William Miracky have released a much revised version of their paper, “Sovereign Wealth Fund Investment Patterns and Performance.”

The paper asks a simple (and fascinating) question: Can states be value creating investors given that they are (according to a large body of research) usually bad operating managers?

The authors assume that “SWFs will not generally make effective monitors of investee company managers and will not create value over the long term.” It turns out they are right:

“On average, the stocks of companies receiving SWF investments appreciate significantly, over the three-day window surrounding the purchase announcement, suggesting that investors welcome SWFs as shareholders. Despite the enthusiastic announcement period market reactions, evidence indicates that SWFs are associated with negative abnormal stock returns over one and two years following the initial SWF investment; our results are robust to the use of multiple benchmarks and event study methodologies.”

So SWFs aren’t all that good at picking stocks; at least in comparison to their private sector brethren. Perhaps this has to do with governance constraints that force them to consider strategic as well as commercial principles in their decision-making?

The paper also has some other fascinating insights:

“SWFs become the allies of target-firm managers and are thus constrained from playing a meaningful disciplinary or monitoring role.”

“The negative impact associated with larger stakes points to the fact that SWFs not only do not create value through monitoring, but may exacerbate conflicts between managers and minority shareholders by freeing the former from effective oversight.

This all reminds me of a something John Nugee of State Street has been telling me (and arguing publicly): the global economy misses out on some potential improvements to corporate governance when SWFs waive their rights to vote their shares and or give up directorships.

Anyway, Bortolotti et al. have a great paper. Get it here.

1 Response to “Are States Good Investors?”


  1. 1 rien huizer April 2, 2010 at 10:37 pm

    A good next step would be to survey WSFs and explain a few things. The most obvious way to boost performance would apparently be to sell soon after the announcement of an SWF acquiring a stake. The acquiring fund should not do that of course, since that would hurt its reputation but a friendly neighbour might, and then the first fund could reciprocate in the next round. That would not please investment banks and issuers who tend to have known intuitively of what this study shows more robustly for a very long time.

    There is of course another good reason for the underperformance, ie that some SWFs invest with a view to achieve something that is not measured by investment returns. For instance, having big stakes in large private banks help the Singapore government to execute its developmental strategy which aims at being one of the world’s premier private banking locations. Losing a few pennies on UBS may be offset by externalities.No doubt this is also the case with domestic investments, even if those externalities are merely political or politician-private, and then the benefits can range from disguised (WTO) protectionist practices all the way to cronyism.


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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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