Are Sovereign Wealth Fund Investments Politically Biased?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday June 11, 2010 at 10:34 am
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Editor’s Note: This post comes to us from Rolando Avendano and Javier Santiso, both from the Organization for Economic Co-Operation and Development (OECD).

Our paper, Are Sovereign Wealth Fund Investments Politically Biased? Comparing Mutual and Sovereign Funds, which was recently made publicly available on SSRN, belongs to a series of studies on Sovereign Wealth Funds and their role in the new financial architecture. The study is a background paper for the Global Development Outlook 2010.

The resilience of Sovereign Wealth Funds was proven during the recent financial turmoil, confirming their status in today’s global financial landscape. Their importance is stressed today, when more countries are considering setting up wealth management institutions. Some emerging economies including Angola, Brazil, Indonesia, Malaysia, Mongolia, Nigeria and Saudi Arabia have recently created or expanded this type of structure for managing their national wealth, while the debate is open in others (Algeria, India).

This research deals with the question of sovereign wealth funds’ investments from a comparative perspective. Based on a unique holding-level data for a group of sovereign funds and mutual funds, it shows that the differences in equity investments between SWFs and other institutional investors are less pronounced than suspected. This is illustrated by comparing the geographical/sector allocation and the targeted firms’ profile. A new dimension of analysis is introduced: the political regime in the sending and recipient countries. Evidence suggests that SWFs and mutual funds’ investments converge when looking at the political profile of targeted countries.

These results point towards some policy implications. First, in line with the OECD viewpoint, double standards for institutional investments should be avoided. Sovereign wealth funds exhibit more similarities than differences to other institutional investors. Second, taking mutual funds as a financial-oriented benchmark, SWFs are investing in countries that are financially rewarding, regardless of the political regime. Third, allocation disclosure is an important step towards transparency, but should not only be a requirement for sovereign wealth managers, but also for other institutional investors, either public or private.

A Working Paper version from OECD is available for download here.

 

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