Weekend Reading

Ashby Monk

Alexander Dyck and Adair Morse have posted an updated version of their paper “Sovereign Wealth Funds Portfolio”. I’ve blogged about this paper before, having seen it presented at Columbia back in September. But I just read the latest version, and I found it to be well worth a second read. Why? First, the authors have collected some amazing data. Second, the summary statistics alone (i.e. before the authors break out their magic math wands) are very insightful. Finally, the paper offers up some interesting econometric results that help to explain what motivates SWFs’ investment decisions.

First, what is their methodology?

“…we assemble time series holdings for all of the important sovereign wealth funds from 1999-2008, including the less transparent Middle Eastern and Asian funds. We include funds with more than $10 billion in assets as of 2007, which results in 20 funds averaging $116 billion per fund with $2.03 trillion in assets under management and $1.43 trillion in risky assets under management.”

It’s clearly a remarkable dataset, which offers a variety of insights:

“First, relative to either capitalization benchmarks or home-biased pension plans, there is a significant tilt towards private equities, toward domestic investments, and towards specific industries. The SWFs in our sample own 2% of global public equities, but this represents on average only half of their portfolio mix (by allocation percent). SWFs risky portfolio mix is, on average, 52% public equities, 29% private equities, and 19% real estate. We find a pronounced home bias leading to SWFs owning 6.4% and 4.3% of the public equity capitalizations in the Middle East and Asia respectively. Perhaps most importantly, we find a distinct industry tilt. SWFs allocate 21% of the portfolios (in both private and public equity) to the finance industry and they own nearly 5% of the public equity capitalization in finance. Other than finance, the industries favored by SWFs include a 15% allocation to energy, 9% to transportation, and 7% to telecommunications. The significant home bias and the industry tilts are particularly surprising as they are in the opposite direction to what would be implied if SWFs were focused on hedging domestic income risk.

“Second, we find a surprising level of active ownership. SWFs invest actively (with control rights) in both public and private sectors but primarily in their home regions and in finance, transportation and telecommunications. Eighty percent of investment value in Asia and the Middle East is invested actively, where we use stakes over five percent to signify active investments. Worldwide, SWFs invest actively in finance (70% of the value), transportation (66% of the value) and telecommunications (45% of the value).”

That’s all very interesting, but the real question then is why these funds ‘tilt’ their portfolios in this manner. What’s their motivation? Again, the authors have some thoughts:

“…we find that these two objectives – financial portfolio investment objectives and industrial planning objectives – explain a significant portion of SWF portfolio variation and that ignoring either dramatically reduces explanatory power…For some funds (Alaska, GIC Singapore and Norway Global), measures of financial portfolio objectives capture almost all of the explained variance. In contrast, for Singapore Temasek, the Investment Corporation of Dubai, Kuwait and China as well as for most of the smaller SWFs, state planning measures account for over half of the variation. In sum, we conclude that one can understand SWFs as an institutional investor group much better by considering their choices driven both by portfolio investor objectives and by state planning objectives.”

In short, Dyck and Morse are arguing what we already suspected: SWFs operate on a “double bottom line” of financial and strategic objectives. They’re surely not entirely strategic (as this paper explicitly shows), but neither are they entirely motivated by financial returns. Interesting.

Enjoy your spring 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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