Guest Blog: Should SWFs Care about Development?

Adam Dixon

I would assume that most readers of this blog would agree that getting investment governance right is easier said than done. Ensuring clarity of mission over time, developing decision-making structures that can operate in real-time, having the right talent, and learning from past experiences, etc., all require a concerted amount of effort and thought within any institutional investor. And even if a fund gets the governance right, there is still no guarantee that a premium on the market will be generated.

So when someone makes the suggestion that institutional investors — and here I’m talking in particular about public pension funds and sovereign wealth funds — operate with specific political and social objectives in mind, it is easy to see why objections are made. Indeed, expanding the mission of a fund beyond the simple premise of maintaining wealth over time can easily erode value, as has happened on numerous occasions when investments are politicized. (Note: I don’t consider ESG factors as being representative of politicization, because, if applied correctly, I do think they can contribute to long-term value).

I would class a concern with “development” in emerging and developing economies as another objective that could easily muddle and complicate a funds long-term financial health. Given the financial resources that SWFs have, and that many come from emerging and developing economies, the pressure to focus on development (broadly speaking) is undoubtedly high. So my question is, should they? The short answer: well, sort of. (And let’s be honest, what’s the point of finance if it doesn’t support economic growth and development?)

On the one hand, a SWF can facilitate development within its home country as part of a broader project of institutional development (and here I’m talking about all the policy trappings of a modern economy that support productive efficiency, macroeconomic stability, and a capable and active workforce). In this model, the SWF is simply a piece of a much larger puzzle. Mitigating Dutch disease through international investment or stabilizing government revenues, are just a couple of the ways a SWF supports development. So, it doesn’t have to prioritize development in its investments because its existence does so implicitly.

If, on the other hand, a SWF does make investments purportedly aimed at economic development, but which are clearly loss making, then the SWF actually undermines its original development objectives. By engaging in loss-making investments, even if they are for the greater good, SWFs will inevitably be dismantled since the rational for their creation was generally to make returns. In the midst of the most recent financial crisis, many sponsors began reconsidering their SWFs existing…even Norway!

This is not to say that sovereign sponsors (i.e. the nation-states) shouldn’t direct funds toward local economic development projects. They should. However, it is better to have multiple entities with specific mandates that they can fulfill. A SWF is a fund designed to make money in financial markets. It is purpose built for this job. If a country wants to facilitate local development, perhaps it’s better to set up a development agency of some kind.

Dr. Adam Dixon is an Assistant Professor at the University of Bristol.

 

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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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