Weekend Reading

Ashby Monk

It’s clearly been a very busy few months for SWF analysts and researchers, as my backlog of papers and articles to discuss on this blog is now at an all time high. In the words of a former boss, ‘This issue must really be hotting up!’ (which is British for ‘this issue is getting hot!’). Anyway, I’m going to knock three papers off my list today. I know it’s probably a lot to take in, but all three came to my attention at the recent Columbia event, which gives me the right to lump them together (even if they are quite different):

First, Andrew Ang wrote a very nice paper entitled “Four Benchmarks for Sovereign Wealth Funds“. What I liked about this paper was its focus on how SWFs can achieve legitimacy at home. It’s a topic that Gordon and I have spent a lot of time writing about (here and here and here and here and here), so it’s gratifying to see other academics (especially as prominent as Ang) take up the charge. Why, you ask, do we care so much about SWF legitimacy? I’ll let Andrew explain it: “Meeting the Benchmark of Legitimacy ensures that the SWF can survive for the long term.” In short, it’s all about providing the SWF with some permanency so that it can successfully achieve its objectives over the long term.

Second, Shai Bernstein, Josh Lerner, and Antoinette Schoar wrote an intriguing paper entitled “The Investment Strategies of Sovereign Wealth Funds.” I personally found this paper a bit controversial, which means it’s definitely worth a gander. Here are some of its conclusions (pulled directly from the intro):

  • “SWFs are more likely to invest at home when domestic equity prices are higher, and more likely to invest abroad when foreign prices are higher…
  • Asian groups and, to a somewhat lesser extent, Middle Eastern SWFs, see the industry P/E ratios of their home investments drop in the year after the investment, while they see a positive change in the year after their investments abroad.
  • SWFs where politicians are involved in governance have a much greater likelihood of investing at home, while those relying upon external managers display a lower likelihood.
  • Once we control for the differing propensity to invest domestically, SWFs with external managers tend to invest in lower P/E industries, while those with politicians involved in the governance process invest in higher P/E industries.
  • Investments by SWFs with the involvement of external managers tend to be associated [with] a more positive change in industry P/E in the year after the deal, while for funds where politicians are involved, the trend goes the other way round.”

In sum, the authors argue that when SWFs invest at home, they tend to lose money (cf Coval and Moskowitz 2001 on the benefits of “informed trading”).

Finally, Alexander Dyck and Adair Morse wrote a neat paper entitled “Sovereign Wealth Fund Portfolios“. The authors use a large dataset (that they themselves painstakingly put together over the course of two years) to try to explain what motivates SWF investment. The data shows that a large proportion of SWF investments are motivated by strategic (as apposed to commercial) interests. And what does this imply?

“Recognizing this dimension to SWFs suggests they will have a much more pronounced effect on industries central to country strategic plans and more pronounced impact on local and regional markets, rather than a general impact on the efficiency of capital markets…The perceived threat to sovereign ownership of North American and European markets seems minor, but the possibility that SWF dominate industries and regions seems valid.”

In sum, all three papers are definitely worth reading and pondering. Still, caveat lector, I can’t help but question the wisdom of using broad based data to make (some pretty controversial) generalizations about the entire community of SWFs. After all, these funds are highly idiosyncratic, which (as I noted the other day) makes benchmarks and peer comparisons problematic. That doesn’t mean to suggest the papers are wrong (in fact, given the talented folks writing them, I’d be inclined to say they’re right), but it does mean you should read and interpret with a critical lens.

Anyway, enjoy your fall weekend.

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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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