Can Transparency Be Profitable for SWFs?

Ashby Monk

A while back I had a discussion with a SWF executive who was trying to make the ‘business case’ for transparency. In other words, he wanted some insights and inspiration for how improving transparency might translate into higher returns for his organization. It was an enjoyable discussion, and we actually managed to come up with quite a few commercial reasons to improve transparency.

One point that really seemed to resonate with this individual was the need to get domestic “buy-in” for the SWF’s operations so as to ensure that it would have a “license to operate” in good and bad times. In other words, if the public was made to understand, and hopefully support, the operations of the fund, then the public would (in theory at least) not challenge the legitimacy of the SWF during short- to medium-term downturns in the market. This would ensure that the fund’s investment horizon would remain long-term, and it would never have to sell assets at a discount because domestic stakeholders changed their mind about a certain investment strategy.

Anyway, I decided to recount this anecdote because it looks like some similar conversations may have been taking place in other SWFs. In particular, I was interested to read this assessment of the recent investigation into the utility of active management that took place within Norway’s GPF-G:

“Where the fund stumbled, Ang says, was in its failure to clearly communicate the types of active strategies that it was pursuing. ‘The Norwegian parliament and public are sophisticated about these matters. For example, when equity markets fell dramatically in 2008, there was no outcry because the Norwegians understood that equity markets could crash.’…In the case of the more recent discord over losses in the assets under active management, Ang suggests that the Norwegian public should have been made aware of the active investment strategies the fund was pursuing prior to 2008. “They would have understood that such strategies might provide low returns or even losses in the short term, and been steeled to expect the downside,” he says.”

In other words, the government would not have been compelled to launch a complete re-evaluation of the fund’s active management policies if it had been more transparent about what it was doing!

And if that’s not compelling enough for you, there are other commercial reasons to improve transparency.  For example, in my discussions with the SWF executive, we also talked about how transparency can ensure access to markets and industries around the world that might otherwise be off-limits to a non-transparent, foreign, government entity. From the perspective of modern portfolio theory, increasing access to these markets and industries would improve risk adjusted return (i.e. further diversify the portfolio).

So there you have it — that’s two examples of how transparency might make a SWF more profitable. In short, there is value in securing the approval of domestic and foreign constituencies…

4 Responses to “Can Transparency Be Profitable for SWFs?”

  1. 1 Natsuko Waki May 24, 2010 at 2:17 am

    From what I’m hearing the jury seems to be out on whether transparency is profitable for SWFs or not and the key I think is what degree of transparency a particular SWF should achieve, given domestic/international considerations. One of the main discussion points in the Baku meeting last year was that too much transparency could hurt SWFs. David Murray from Future Fund said then that front-running SWFs by some investors hurts their returns and it’s not in their interest nor private sector’s to be involved in this game. And CIC’s Jin told me there that pushing for excessive transaprency does more harm than good…

  2. 2 Ashby Monk May 24, 2010 at 9:02 am

    Thanks for the comment, Natsuko. You’re correct that the key is the level of transparency. I definitely recall all the front running stuff surrounding Kumar at McKinsey and the Baku discussion. I’m just not all that convinced. I think there are ways to be transparent about past behavior, while holding onto some secrecy about current and future activities. And as for Jin, it depends on what he means by “excessive transparency”. Sounds to me like he is building a “straw man” with such a statement…

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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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