Posts Tagged 'research'

The Impact of SWFs

Ashby Monk

With so many new sovereign funds popping up around the world, I think it’s fair and opportune to ask a simple question: What benefit(s) do sponsoring countries receive from their SWFs? I’ve had a few thoughts on this topic (see here, here and here for some examples), but a new report by PwC is really quite insightful in this regard. The report — entitled ‘The impact of Sovereign Wealth Funds on economic success‘ —  catalogues the effects that a SWF has on the economy of the sponsoring country. Here’s a blurb:

“To understand whether a Fund has a material impact on the host economy…we analysed the historic performance of 51 countries over 30 years. The countries selected either had a Sovereign Wealth Fund, or had the potential to have a fund, thanks to significant commodity income or trade surpluses over the period. Comparing the two groups enabled us to see how their relative performance had varied over time and helped us isolate the fund’s impact.”

And what do they find? Here are the key findings lifted from the report:

  • “Setting up a Sovereign Wealth Fund may help to reduce inflation – the presence of a fund is linked to lower inflation, even when we account for a number of other factors likely to affect inflation, such as monetary policy stance, the state of the labour market and the current account balance. This result is stronger for commodity rich countries than for those with a non-commodity based trade surplus.
  • Exchange rate appreciation may be lessened by a Sovereign Wealth Fund – in countries with floating exchange rates we found a relationship between the presence of a Sovereign Wealth Fund and a weaker exchange rate. The effect was equally strong for countries with and without commodity wealth. This may occur because monies can be held in foreign currencies (often in US dollars), so not bidding up the value of the local currency.
  • Sovereign Wealth Funds may help improve transparency in an economy– our analysis found levels of transparency to be correlated with measures of economic development such as GDP per capita and the depth of financial markets. Even when these factors are taken into account, however, we see lower levels of perceived corruption in countries where a Fund is present. The effect appears slightly stronger in countries with non-commodity based trade surpluses.”

In short, a SWF helps to control inflation, manage exchange rates, improve transparency, and minimize corruption. I find that fascinating.

Thanksgiving Reading

Ashby Monk

It’s Thanksgiving here in the US of A, which means two things. First,  it means there are decorative gourds aplenty on tables and doors across the country. And, second, it means we’ve got four straight days of friends, family, food, and football. It’s awesome. So, I’m taking a break from the blog until Monday.

However, for those readers who have come to expect (or even need) a daily dose (fix) of SWF news and analysis, I’m not going to leave you hanging. Here’s a four day supply of SWF research:

  1. Michael Fini has a new paper entitled “Financial Ideas, Political Constraints: Sovereign Wealth Funds and Domestic Governance.”
  2. Thorvaldur Gylfason has a new paper “Natural Resource Endowment: A Mixed Blessing?
  3. April M. Knill, Bong Soo Lee, and Nathan Mauck have published a new paper entitled “Sovereign wealth fund investment and the return-to-risk performance of target firms.”
  4. Yelena Kalyuzhnova has published a new paper entitled “The National Fund of the Republic of Kazakhstan (NFRK): From accumulation to stress-test to global future.”

Happy Thanksgiving!

Long-Term Investing and Fiduciary Duty

Ashby Monk

There are a lot of people and organizations thinking about ways to extend the time-horizon of institutional investors these days. For example, there’s this World Economic Forum project on long-term investing. There’s also a new ‘long-term investors club’ in France. And there are a variety of smaller initiatives and projects, like the work we’re doing at Stanford and Oxford on the design, governance and management of pensions and sovereigns. As such, I expect over the next few months and years we’ll be seeing a stream of interesting research on this topic.

On cue: My Oxford colleague Gordon Clark has just published a paper that really adds to our understanding of the institutional constraints to long-term investment strategies within pension funds. The paper is entitled “Fiduciary Duty, Statute, and Pension Fund Governance: The Search for a Shared Conception of Sustainable Investment.” Here are some blurbs to whet your appetite:

“Fiduciary duty is the golden rule ‘regulating’ the relationship between trustees and beneficiaries. In principle, it regulates behaviour by pre-empting those actions that would harm the interests of beneficiaries while promoting duties of care consistent with the interests of those that stand to gain from well-intentioned and responsible decision-making. But, in many respects, fiduciary duty is a chimera: it looks to convention rather than forward to innovation in investment management. As such, governance policies and practice must provide the instruments that simple recipes of fiduciary duty are ill-equipped to provide. In this paper, I argue that the design and governance of investment management institutions is, actually, more important than honouring the principle fiduciary duty which, in the context of Anglo-American statute, is increasingly empty.”

And if that didn’t raise your eyebrows, try this:

“In so many ways, fiduciary duty has been so denuded by government regulation that what is left is a rhetorical gesture on behalf of those that stand to benefit by the status quo. At best, fiduciary duty remains as a case specific mechanism for restitution in circumstances where government policy, regulation, and its guarantee institutions are either not relevant or unable to deal with the issue. At worst, fiduciary duty remains as a trump card for those that would wish to protect their own interests in the face of obvious demands for profound change in the nature of investment practice.”

Note to the Long Term Investor Council of the World Economic Forum: Gordon can be found here.

Airplane Reading

Ashby Monk

By the time this post hits your screen, I’ll be somewhere over the Pacific ocean. Much to the chagrin of my (saintly) wife (who will be home alone with the baby), I’ll be spending the next 10 days in Kuala Lumpur and then Singapore. I’ll be attending two big conferences (PPI and Institutional Investor) as well as giving a small seminar and catching up with friends. But, above all else, I’ll be spending a lot of time on airplanes. So I’m coming prepared with reading materials. Of particular interest to this crowd is probably Vol. 12 of the International Finance Review, which has six (!) papers on sovereign funds (and a host of other papers that look really interesting). Anyway, I’ll do my best to keep the blog lively while I’m on the road. See you in Asia!

Weekend Reading: New Research

Ashby Monk

In the spring I wrote a background paper for the Asian Development Bank with Adam Dixon on how sovereign funds could help countries manage their resource revenues. I’ve finally gotten around to loading it up on SSRN. Apologies for the delay. Anyway, our paper is entitled “The Design and Governance of Sovereign Wealth Funds: Principles & Practices for Resource Revenue Management.” It was actually a lot of fun to write, as Adam and I really dug into the design features that (we think) make sovereign funds effective. Here are some blurbs:

“There is no such thing as a cut and paste blueprint for a best-practice SWF the world over. The highly idiosyncratic nature of each country’s specific circumstances means that every country needs a practical design that will work within the constraints of the given environment. So, while a plethora of potential SWF sponsors have been making pilgrimages to Oslo to learn how to set up a “successful sovereign fund” in the image of the Government Pension Fund – Global, there is nothing to suggest the Norwegian SWF will match up with other countries’ local characteristics. In fact, the politicized nature of the investment decision-making process in the GPF-G is probably inappropriate for most developing countries even if it works extremely well in the Norwegian case (see Clark and Monk 2012). As Frankel (2010, 31) points out, “Norway’s legal system puts few restrictions on what policy-makers can do, and the fund is managed with political objectives that go unnoticed when held up as an example for developing countries to emulate.” In other words, the institutions and norms in developed economies are different from those in emerging and developing economies. So, while there is much to be learned from other countries’ experiences with SWFs, what works in Norway won’t necessarily work in Nigeria, and what works in Alaska won’t necessarily work in Angola. Moreover, there is nothing to suggest that developed economies are the only countries capable of setting up effective SWFs. To the contrary, Botswana, Timor-Leste and Trinidad & Tobago have all established successful commodity funds in the developing world. It all depends on matching the organization with the environment. As such, in conceptualizing a specific SWF design, drawing some guiding principles and practices from ‘exemplars’ is perhaps more useful than specific policy prescriptions derived from success stories.

Successful design principles embrace, at the most fundamental level, the local economic geography by seeking to harness the local benefits and overcome the local constraints to create a best-practice investor that can operate in global financial markets. Indeed, at the global level, the fund has to be capable of responding to the challenges faced by all investors operating in global financial markets. This means managing risk and uncertainty across a variety of spectrums in a dynamic environment. As such, the SWF design spectrum will converge towards ‘best practice’ at the level of the fund that operates globally, while the local inputs can vary widely.”

Anyway, I hope the paper is of use. Enjoy your weekend!

The Value of Bottom-Up Analysis

Ashby Monk

I think we can agree (…or I hope we can…) that institutional investors were poorly served by conventional finance theory over the past few years, especially in the area of risk management. As such, I’m of the mind that we need more academics challenging the ontology (dare I say ideology) of finance and economics in this domain — not because I’m some revolutionary trying to replace top-down approaches with a new intellectual toolkit, but because I think the people using the quantitative tools need to understand their limitations and, better still, supplement these top-down tools with bottom-up approaches.

Enter Dan Awrey of Oxford University: He recently posted a (now very popular) paper to SSRN entitled “Complexity, Innovation and the Regulation of Modern Financial Markets.” It’s a neat article that looks to “establish a more stable and constructive equilibrium between financial theory and financial regulation”. More specifically, Awrey shows the complexity of global financial markets and, in turn, demonstrates why attempts to “generalize” and “abstract” through mathematical models is so difficult. Here are some blurbs I thought were particularly insightful:

“As American essayist H.L. Mencken once observed: ‘for every complex problem there is an answer which is clear, simple and wrong’.”

“The intellectual origins of the global financial crisis of 2007-2009 (GFC) can be traced back to shortcomings – blind spots – emanating from within conventional financial theory. These blind spots are distorted reflections of the perfect market assumptions underpinning the canonical theories of financial economics.”

“These theories share a common and highly stylized view of financial markets, one characterized by, inter alia, perfect information, the absence of transaction costs and rational market participants. Yet in reality financial markets – and market participants – rarely (if ever) strictly conform to these assumptions.”

“…the empirically (con)testable assumptions of conventional financial theory have been transformed into the central articles of faith of the ideology of modern finance: the foundations of a widely held belief in the self-correcting nature of markets and their consequent optimality as mechanisms for the allocation of society’s resources.”

“This market fundamentalism was grounded in the conviction that rational and fully informed market participants – utilizing sophisticated quantitative methods and the innovative financial instruments these methods made possible – had effectively mastered risk.”

“The GFC has revealed the folly of market fundamentalism as a driver of public policy. It has also exposed conventional financial theory as fundamentally incomplete. Perhaps most glaringly, conventional financial theory failed to adequately account for both the complexity of modern financial markets and the nature and pace of financial innovation.”

I can’t really speak to the paper’s claims about regulation (not my forte), but I can repeat the fact that I’m sympathetic to the author’s views about finance theory. In fact, I think they are awesome. Why? Because I’ve been frustrated with these same issues for over a decade.

Some background on me: After doing a BA and MA in economics with a concentration in finance, I bailed and left academia altogether. I was only convinced to return to the academy when I got an opportunity to join a program (Oxford University’s program in economic geography) that afforded researchers methodological freedom. In economic geography, I found a discipline that encouraged researchers to understand and appreciate the immense complexity and idiosyncrasies of the economic world around us rather than constantly trying to generalize through models. I chose research topics based on their relevance and importance rather than on the availability of quantifiable data. It was fantastic.

But there were consequences: my old colleagues had disdain and contempt for my decision to leave the ‘church of economics’ in search of truth elsewhere. I recall presenting some qualitative research to a group of young economists in Washington DC (…we’d all been awarded the same research grant…) to curious and skeptical views. At the end, I didn’t get a single question. It was painful.

My frustration that economists simply didn’t “get the value of what I was doing” boiled over in 2006 near the end of my PhD. I convinced my wife (who was  also a PhD candidate — but in economics) to write a paper with me specifically for the Oxford economics department (via a student run journal). The objective: To make economists aware of the value of a ‘bottom up’ approach to understanding economic issues.

Anyway, the paper generated some interesting and gratifying discussions. But the real change ultimately came with the financial crisis: people started to understand the value of field work — of local appreciation. I still think the discipline of economics has a long way to go. (For example, when was the last time you read an economics paper based on a series of case studies? Maybe Ronald Coase in developing his theory of the firm? Or Adam Smith’s pin factory for division of labor?) Nonetheless, multi-method approaches are becoming more popular (and accepted)…and that’s a good thing. True appreciation of the economic landscape requires both top-down and bottom-up approaches.

Weekend Reading: New Research

Ashby Monk

I’ve just released a new background paper for the Center for Global Development with Dr. Adam Dixon entitled “What Role for Sovereign Wealth Funds in Africa’s Development?” It was a fun paper to work on with a pretty lofty objective: Developing a policy framework for how developing economies can use SWFs to help overcome the resource curse. Here’s the abstract:

“The discovery of natural resources in a developing country is not generally the good news it appears to be. In fact, resource-rich developing countries face the significant challenge of using their natural wealth to improve the living standards of average citizens, rather than wasting it through weak institutions and corruption – a phenomenon often referred to as the “resource curse.” Civil wars and political turmoil tend to exacerbate the problem. One increasingly popular option for dealing with the resource curse is the commodity-based sovereign wealth fund (SWF). Angola, Ghana, Mozambique, South Africa, Uganda and Nigeria are set to join other African countries, such as Botswana and Mauritania, in turning to these special-purpose financial vehicles to help ensure proper management of resource revenues. By sequestering some of their resource revenues in a SWF, these countries hope to smooth resource price volatility, make long-term fiscal policy, manage currency appreciation, facilitate intergenerational savings, and, perhaps most importantly, minimize corruption and tame the political temptation to misuse the newfound wealth. However, as Nigeria’s experience with the Excess Crude Account illustrates, it is not enough just to set money aside. The success of SWFs is ultimately a function of good governance and clear mandates. This paper illustrates the key ingredients required for an SWF to succeed at facilitating development in the African context.”

We hope you find it useful — any and all feedback is welcome! I’ll leave you with our simplified policy framework for SWFs in the developing world: the SWF Cascade!


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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