Are Sovereign Wealth Funds Politically Biased? A Comparison with other Institutional Investors

Abstract

Purpose – To study the allocation in equity markets of sovereign wealth funds’ (SWF) investments with respect to other institutional investors. To analyze the role of political regimes in the sending and recipient countries as a determinant of the allocation of SWF investments.

Methodology/approach – We use mutual funds’ investments as a benchmark for SWF investment allocations. We collect data of SWF and mutual fund equity investments at the firm level and analyse them on a geographical and sector basis. We compare target investments for these two groups by looking at the political regime in the sending and recipient country, using different political indicators (Polity IV, Bertelsmann). We provide a comparison of SWFs and pension funds based on governance features related to investment.

Findings – We find that the fear that sovereigns with political motivations use their financial power to secure large stakes in OECD countries is not confirmed by the data. SWF investment decisions do not differ greatly from those of other wealth managers. Although there can be differences in the allocation, political regimes in the recipient countries do not play a role in explaining the allocation of sovereign wealth funds.

Social implications – Investment from public institutions, such as sovereign wealth funds, can have significant implications at the economic and social level. Sovereign funds are potential sources of capital for emerging economies, and therefore can enchance economic growth. It is important to understand to what extent public institutional investors behave differently from private investors. The “political bias” is not a relevant factor for sovereign funds, or for other institutional investors, for allocating their capital. More often than not, their asset allocation strategies converge with other large investors, these being driven by financial and not political bias.

Originality/value of the chapter – The chapter is an original contribution providing a firm-level analysis of equity holdings for two groups of institutional investors. Moreover, it emphasizes the political dimension of institutional investments, highlighting the priorities and constraints of public investors participating in financial markets. The chapter suggests that SWFs do not discriminate by the political regime of the recipient country in their asset allocation.

Citation

Avendaño, R. and Santiso, J. (2011), "Are Sovereign Wealth Funds Politically Biased? A Comparison with other Institutional Investors", Boubakri, N. and Cosset, J.-C. (Ed.) Institutional Investors in Global Capital Markets (International Finance Review, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 313-353. https://doi.org/10.1108/S1569-3767(2011)0000012015