Sovereign wealth fund investments and policy implications: a survey

Author:Chen Meng
Position:School of International Trade and Economics, University of International Business and Economics (UIBE), Beijing, China AND Leeds University Business School, University of Leeds, Leeds, UK
Pages:210-229
SUMMARY

Purpose - The purpose of this paper is to address a research gap by providing a comprehensive survey of sovereign wealth funds (SWFs) as international institutional investors and clarifying the definition of SWFs. By doing so, this paper aims to provide a balanced set of policy prescriptions towards SWFs. Design/methodology/approach - This paper conducted a comprehensive survey of world major 24 SWFs with assets under management of 500 million USD... (see full summary)

 
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Sovereign wealth fund
investments and policy
implications: a survey
Chen Meng
School of International Trade and Economics,
University of International Business and Economics (UIBE), Beijing,
China and Leeds University Business School, University of Leeds,
Leeds, UK
Abstract
Purpose – The purpose of this paper is to address a research gap by providing a comprehensive
survey of sovereign wealth funds (SWFs) as international institutional investors and clarifying the
denition of SWFs. By doing so, this paper aims to provide a balanced set of policy prescriptions
towards SWFs.
Design/methodology/approach – This paper conducted a comprehensive survey of world major 24
SWFs with assets under management of 500 million USD between 2008 and 2012. Key dimensions
include objectives, funding and governance, asset allocation and investment activities.
Findings – SWFs are planning institutions with management direction. They present great variety in
terms of funding mechanism, governance, asset allocation and investment strategies, but they in
essence pursue nancial returns. It is not evident that SWFs are primarily motivated by political
objectives and distinctively different from other international institutional investors. Difculty in
interpreting SWFs should not lead to the imposition of constraints on SWFs.
Research limitations/implications – More in-depth and dynamic analysis of SWFs requires better
data access. For such a purpose, case studies and longitudinal studies should be adopted, with
particular emphasis on comparing SWFs with different types of nancial institutional investors as well
as typical state-owned enterprises (SOEs) and multinational enterprises.
Practical implications – This study is trying to demystify SWFs based on a comprehensive survey.
As a result, this paper may assist investors, policy-makers and regulators to gain a better
understanding of SWFs, their investment behaviours and rationales behind.
Social implications – SWFs like other long-term capital is important for economic and job growth.
To attract long-term investments, creating an open, unbiased and welcoming investment environment
is the key.
Originality/value – The contribution of this paper is that we provide a deeper understanding of the
strategy and empirics of SWF operations. First, after a clearer denition of the phenomenon of SWFs,
we can explain their investment strategies and behaviour as rms. Second, we can derive rational policy
prescriptions, and third, we can propose a research agenda that will further deepen our understanding
of SWFs and the appropriate policy prescriptions.
Keywords Governance, Firm, Investment strategy, Sovereign wealth fund, Policy response
Paper type Research paper
Professor Peter J. Buckley for his constructive comments and contribution to this paper. Special
thanks to Ms Chunyang Jiang from Tsinghua University for her assistance in compiling the data
set.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
23,3
210
Journalof Financial Regulation
andCompliance
Vol.23 No. 3, 2015
pp.210-229
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-10-2014-0041
Aims and objectives
This paper reviews previous research on sovereign wealth funds (SWFs) and suggests
that previous academic work on the subject of SWFs has taken a partial and somewhat
unfavourable view of SWFs, and this article seeks to redress the balance. It suggests
that previous works have not fully understood the phenomenon of SWFs because they
do not provide a clear denition of SWFs and they do not provide a comprehensive
overview of SWFs. This article addresses a research gap by providing a comprehensive
survey of SWFs as international institutional investors and clarifying the denition of
SWFs. In addition, an unfortunate consequence of previous writings on SWFs has been
an ambiguous and unbalanced set of policy prescriptions which this piece seeks to
redress.
This article has four main sections. First, it provides a clearer denition of SWFs
which allows us to differentiate clearly these funds from their “near neighbours”.
Second, we review relevant literature and identify their limitations. The third section is
a comprehensive survey of SWFs based on which we provide (fourth) sound policy
prescriptions. The conclusion provides a research agenda on SWFs in the light of our
analysis.
The denition of SWFs
There is a range of denitions for SWFs. Some dened SWFs as government-owned
investment vehicles, funded from foreign exchange reserves and scal surplus (OECD,
2009;Jaeger, 2010;Barbary et al., 2010;Washington Agreement, 2008;Das et al., 2010)
and invest internationally for a variety of objectives.
SWF is more carefully dened by the Santiago Principles (SP) (2008,p.27,
Appendix 1) as:
[…] special purpose investment funds or arrangements, owned by the general government
including both central government and sub-national government. SWFs hold, manage, or
administer assets to achieve nancial objectives. The SWFs are commonly established out of
balance of payments surpluses, ofcial foreign currency operations, the proceeds of
privatizations, scal surpluses, and/or receipts resulting from commodity exports, such as the
revenues received from mineral wealth or excess reserves. Generally, SWFs […] invest long
term overseas.
The SP’s denition excludes foreign currency reserve assets held by monetary
authorities for the traditional balance of payments or monetary policy purposes,
operations of state-owned enterprises in the traditional sense, government employee
pension funds or assets managed for the benet of individuals. It also excludes funds
that solely invest domestically.
Table I exhibits the differences between SWFs and similar institutions. SWFs are
quite distinct from government-owned pension funds which have well-dened liabilities
and from state-owned enterprises whose primary function is production or the provision
of services and conduct direct foreign investments. SWFs typically invest in stocks and
bonds, including portfolio foreign investment. When they take a controlling interest,
they are undertaking foreign direct investment (FDI). SWFs also differ greatly from
hedge funds and private equity funds. The latter ones are privately owned shareholder
activists and carry out highly leveraged operations. Hedge funds, in particular, are
stand-alone, unregulated pools of capital, that often practice a more aggressive and
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Sovereign
wealth fund
investments

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