Weekend Reading

Ashby Monk

The IMF has just released a new working paper by  Peter Kunzel, Yinqiu Lu, Iva Petrova, and Jukka Pihlman entitled, “Investment Objectives of Sovereign Wealth Funds—A Shifting Paradigm.” If you’ve been curious what SWFs have been doing with their money — before, during and after the crisis — this is a must read. Here’s a blurb:

“This paper examines the ways in which different types of SWFs approach their investment objectives, describes the impact of the crisis on SWF performance, reviews the extent to which portfolios have been reallocated, and draws lessons about how and why the investment behavior of SWFs has changed. Looking forward, it also considers additional issues that may need to factor more prominently in SWF’s investment strategies, including macro-stabilization and asset-liability management considerations, as well as forthcoming adjustments to the global regulatory environment.”

And, weighing in at only 14 pages, the paper manages to deliver on all of that. One of its accomplishments is explaining why a fund’s mandate should influence strategic asset allocations (SAA). After all, a savings fund, a stabilization fund, a reserve investment corporation and a pension reserve fund have different constraints that should, at least in theory, drive SAAs in different directions. Also, the authors do a good job of teasing out insights from the recent crisis. Anyway, here are some of the most interesting bits:

“The crisis has affected SWFs’ asset allocations in different ways. Several SWFs with stabilization objectives have reduced their shares of cash holdings either because of the use of cash resources (Chile-ESSF), or because of moving to fixed income (Trinidad and Tobago). Alaska Permanent Fund and Ireland National Pension Reserve Fund have increased the share of their cash holdings. SWFs with previous investment in alternative assets have increased their investments in such assets, presumably with a view to further diversifying their portfolios. The KIC has introduced alternative assets investment and increased their equity shares. Notwithstanding the impact of the crisis, some SWFs have also continued with the implementation of previously approved SAAs—for example, Norway has increased equity shares, and the Australian Future Fund has introduced fixed-income and increased equity and alternative assets investments in its portfolio. In the case of Norway, the continuous implementation of the SAA helped it to benefit greatly from the rebound of risk assets since early 2009.”

“Still, in many cases a profound change in an SWF’s SAA may not be justified. Instead, SWFs may need to improve their communication strategies and put more effort into educating stakeholders about their operations and risks. In the case of savings-type SWFs, this direction requires that owners and other stakeholders understand the likelihood of encountering short-term losses and have the ability to tolerate them. This may be easier to achieve in an environment of overall political and economic stability, with well-engrained frameworks for medium- and long-term planning, and good crisis management planning and coordination.”

I couldn’t agree more with that last paragraph. Anyway, here’s a cool chart demonstrating how SAAs changed through the crisis:

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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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