Sovereign Fund Distractions

Ashby Monk

I’ve talked at length about the unique characteristics that make SWFs well-positioned to invest in long-term and illiquid assets classes (see this and this and this for details). I’ve also spent quite of bit of time thinking about why SWFs aren’t taking advantage of these characteristics — why SWFs tend to focus on short-term investment strategies.  Well, Ashby, think no further! A recent IFSWF report has some answers. Specifically, the report has survey results detailing why SWFs find themselves getting distracted from their long-term policy objectives (see Chart).

When I look at this Chart, I interpret the four response options a little differently. I see: a) performance; b) performance; c) performance; and d) other stuff. Clearly, SWFs are getting a lot of pressure from stakeholders to demonstrate they are doing their jobs well, and this means showing good returns. As such, when a crisis arrives (a), the funds will do something in the short term to “right the ship”. Or when transparency is increased (c), it may mean having to respond to stakeholders’ demands when the fund has an off year. Whatever the case, short-term demands are limiting funds’ ability to invest over the long term.

In my view, this means SWFs still have a long way to go to educate their stakeholders on what it really means to be a long-term investor. Because if the public understood and supported the operations and objectives of a sovereign fund, then it should not question the fund’s legitimacy during market downturns. In my view, then, resolving (a), (b) and (c) is about communicating effectively with stakeholders. I’m not saying that’s easy; I’m just saying that’s probably the solution.

4 Responses to “Sovereign Fund Distractions”

  1. 1 Victoria Barbary July 15, 2011 at 2:05 am

    Great Post Ashby. Goes to several regular readers’ of this blog’s opinions that transparency isn’t necessarily good for SWFs because it either a) forces them to report an “acceptable” return every year to justify their existence to stakeholders and to national, international, supranational interested parties; or b) it forces them to be conservative in their investments (cf. Norway), so they don’t maximise their competitive advantage of having no (or distant) liabilities and post lower returns than they could – the ADIA/GPFG 20-year return is case in point (11.5% vs 4.5%).

    If one were to be provocative, one might suggest that with many of the newer SWFs approaching their 10th birthdays, maybe this is a time for them to have a decannual report, outlining their performance over a 10-year period. This would satisfy both a desire for transparency on one side and the need to maintain the integrity of the long-term investor on the other.

    The alternative, as you suggest, which is considerably harder and probably less appealing to many SWFs, is stakeholder education about the nature of long-term investors.

    In the UK, every investment product sold comes with a statutory warning that “the value of your investment may go down as well as up”. It strikes me that something similar needs to be enshrined for SWFs: “While we will make X% gains over a period of 1 or 2 decades, in the intervening years, the value of the fund may go up at a slower rate.”

    All I can say is, roll on IFSWF permanent secretariat with a strong research and communications function. Yet, this is difficult when many SWFs come from less-than-open business and political environments. Western SWFs maybe happy with this, but are you going to persuade Qatar, China etc. that this is in their best interests? It’s a tough one.

  2. 3 MMcC July 15, 2011 at 3:47 am

    That’s a great point about the first ten years marking a milestone for performance, governance and transparency. In China, one could argue that NCSSF – which endured considerably less prerogative-guarding and attempted co-opting than CIC – needed about seven years fully to exert its autonomy and to have its intents and working practices fully understood by peers and supervisors. Perhaps a fact of SWF life will be a long (duration of two governments, perhaps?) settling-in period before greater degrees of transparency become possible.

    • 4 Ashby Monk July 15, 2011 at 5:57 am

      Hi Mike: Yeah. You can’t build up a sophisticated asset manager over night. Even the Canadians (savvy) took years to build their big pensions up to where they are today. It’s no easy feat. Thanks for the comment.

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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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