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Book part
Publication date: 27 September 2011

Christopher Balding and Yao Yao

Purpose – Study the investment and risk management approach of sovereign wealth funds when national wealth including natural resources is accounted for rather than only financial…

Abstract

Purpose – Study the investment and risk management approach of sovereign wealth funds when national wealth including natural resources is accounted for rather than only financial asset.

Methodology/Approach – Using a range of widely used asset classes, we simulate sovereign wealth fund returns when considering only financial assets but also under varying levels of national wealth holdings in oil. We optimize two-asset financial portfolios and three-asset portfolios when including oil to maximize the risk-adjusted returns.

Findings – Sovereign wealth funds by failing to invest for the national wealth portfolio are overlooking a major source of volatility. To reduce the level of volatility associated with yearly national wealth returns, allocating a higher percentage of fixed assets to high-quality fixed income and low-risk equities will maximize the risk-adjusted returns of national wealth for sovereign wealth fund states.

Social implications – By focusing solely on the financial assets managed by sovereign wealth funds, states are exposing themselves to significant national wealth risk.

Originality/Value of the paper – This is the first work to estimate the impact on national wealth of oil-dependent states by failing to account for volatile commodity prices through the investment strategies of sovereign wealth funds.

Details

Institutional Investors in Global Capital Markets
Type: Book
ISBN: 978-1-78052-243-2

Keywords

Book part
Publication date: 27 September 2011

Rolando Avendaño and Javier Santiso

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…

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.

Details

Institutional Investors in Global Capital Markets
Type: Book
ISBN: 978-1-78052-243-2

Keywords

Book part
Publication date: 27 September 2011

Narjess Boubakri, Jean-Claude Cosset and Nabil Samir

Purpose – Run a comparative analysis between investments of sovereign wealth funds (SWFs) and mutual funds, focusing on firm-level, country-level, and institutional…

Abstract

Purpose – Run a comparative analysis between investments of sovereign wealth funds (SWFs) and mutual funds, focusing on firm-level, country-level, and institutional variables.

Methodology/approach – We use a hand-collected sample of 1,845 acquisitions around the world over the last 25 years (251 for SWFs and 1,594 for mutual funds). We then run univariate parametric and nonparametric tests to assess the differences in the investments of both subsamples.

Findings – We review the literature on the determinants of SWFs' investment decisions. Our analysis adds to the scarce available literature on the investment decisions of SWFs and their comparison with other institutional investors. Our results show that, compared to mutual funds, SWFs indeed exhibit different preferences: for instance, SWFs prefer to acquire stakes in larger, less liquid companies which are financially distressed but which also have a higher level of growth opportunities. They also prefer less innovative firms with more concentrated ownership, which are located in less developed but geographically closer countries with whom they do not necessarily share cultural and religious backgrounds.

Social implications – Our results are important for practitioners and firms seeking to attract a given type of institutional investment. They also add insights to the debate on the “hidden” political objectives behind SWF investments in the Western world.

Originality/value of paper – This is the first attempt to empirically assess the differences in the investment choices of SWFs and mutual funds.

Details

Institutional Investors in Global Capital Markets
Type: Book
ISBN: 978-1-78052-243-2

Keywords

Book part
Publication date: 27 September 2011

Elvira Sojli and Wing Wah Tham

Purpose – Study the role of sovereign wealth funds (SWFs) as an example of foreign and politically connected large shareholders, and their impact on firm…

Abstract

Purpose – Study the role of sovereign wealth funds (SWFs) as an example of foreign and politically connected large shareholders, and their impact on firm value.

Methodology/approach – Use a sample of SWF large U.S. investments where SWFs intend to actively engage with management to analyze not only whether but also why SWF investments outperform the market in both the short- and long term from the perspective of internationalization, political connections, and corporate governance.

Findings – Foreign and politically connected large investors, like SWFs, improve firm value through the provision of SWF domestic market access and government-related contracts. In the short run, the market welcomes SWF investments in expectation of potential monitoring and internationalization benefits. In the long run, the target firms’ degree of internationalization and Tobin's q increase substantially after SWF investments. The increase in q is directly related to the number of government-related contracts granted by SWF countries.

Social implications – SWF investment benefits appear to outweigh the costs for firm value and shareholders. The results point to the benefits of large and foreign investors for shareholders.

Originality/value of paper – This is the first work to provide evidence on how foreign government-related shareholders can affect firm value.

Details

Institutional Investors in Global Capital Markets
Type: Book
ISBN: 978-1-78052-243-2

Keywords

Book part
Publication date: 27 September 2011

Thouraya Triki and Issa Faye

Purpose – This chapter discusses the potential role that Sovereign Wealth Funds (SWFs) could play to enhance development in African economies, both as recipient and home…

Abstract

Purpose – This chapter discusses the potential role that Sovereign Wealth Funds (SWFs) could play to enhance development in African economies, both as recipient and home countries.

Methodology – We use hand collected data on the universe of Africa's SWFs, their sizes and transparency, and reporting scores to provide a landscape of these funds. We also focus on a sample of investments in Africa made both by African and foreign SWFs to describe the type of interventions these vehicles have been making on the continent.

Findings – Our analysis shows that African SWFs are small, suffer from poor governance, and are mainly focused on stabilizing local economies. This suggests that their potential role as long-term institutional investors to foster economic growth is likely to be limited if current practices are maintained. On the other hand, foreign SWFs are increasingly interested in Africa and are poised to play a bigger role in supporting the continent's growth if the right strategies are implemented.

Social implications – The chapter identifies opportunities that Africa offers to SWFs as well as the challenges that need to be addressed in order to enhance SWFs' role in supporting the continent's development.

Originality/value of paper – This chapter provides the first comprehensive landscape of African SWFs while also describing their interventions. It also uses an original data set to describe the geographic and sector distributions of foreign SWFs investments in Africa.

Details

Institutional Investors in Global Capital Markets
Type: Book
ISBN: 978-1-78052-243-2

Keywords

Book part
Publication date: 27 September 2011

Tao Sun and Heiko Hesse

Purpose – Study the potential implications of sovereign wealth funds (SWFs) on financial stability.Methodology/approach – By assessing whether and how stock markets react to the…

Abstract

Purpose – Study the potential implications of sovereign wealth funds (SWFs) on financial stability.

Methodology/approach – By assessing whether and how stock markets react to the announcements of investments and divestments to firms by SWFs, this chapter takes advantage of a hand-collected database on investments and divestments by major SWFs to evaluate the short-term financial impact of SWFs on selected public equity markets in which they invest.

Findings – Results show that there was no significant destabilizing effect of SWFs on equity markets, which is consistent with anecdotal evidence.

Social implications – SWFs could promote financial stability and should be given more development space.

Originality/value of the chapter – This study contributes to the emerging academic literature that seeks to analyze the behavior of SWFs in financial markets.

Details

Institutional Investors in Global Capital Markets
Type: Book
ISBN: 978-1-78052-243-2

Keywords

Book part
Publication date: 3 May 2011

Ravi Ramamurti

As FDI flows grew in volume and complexity in the 1990s and early 2000s, three new players appeared on the global stage: sovereign wealth funds (SWFs), which were…

Abstract

As FDI flows grew in volume and complexity in the 1990s and early 2000s, three new players appeared on the global stage: sovereign wealth funds (SWFs), which were government-controlled entities with the authority to take significant equity stakes in foreign firms; private equity (PE) firms, which resorted increasingly to cross-border acquisitions, and emerging-market multinational enterprises (EMNEs), which ratcheted up their overseas acquisitions and investments. While none of these players was entirely new, each became more visible in the 2000s. Looking ahead, we anticipate that SWFs will continue to be marginal FDI players, with a few exceptions, despite their high visibility; that PEs will play a highly volatile role, varying from marginal at times to important at others; and that only EMNEs were already quite important in 2009 and likely to gain in importance, as emerging economies become prime movers of the global economy. The global financial crisis of 2008–2009 may thus only have speeded up the inevitable rise of emerging economies as both sources and destinations for FDI. We further conclude that EMNEs will contribute significantly to sustainable development because of their distinctive capabilities in making and selling products for low-income customers, and their emerging competence in “green” technologies.

Book part
Publication date: 27 September 2011

Narjess Boubakri, Jean-Claude Cosset and Hyacinthe Y. Somé

Institutional investors have increasingly gained importance since the early 1990s. The assets under management in these funds have increased threefold since 1990 to reach more…

Abstract

Institutional investors have increasingly gained importance since the early 1990s. The assets under management in these funds have increased threefold since 1990 to reach more than US$45 trillion in 2005, including over US$20 trillion in equity (Ferreira & Matos, 2008). Further, the value of institutional investors' assets represents roughly 162.6% of the OECD gross domestic product in 2005 (Gonnard, Kim, & Ynesta, 2008). Given the magnitude of institutional investors' holdings relative to the world market capitalization, challenging questions on the economic role of these investors have been raised. One such question concerns their impact on the stability of stock markets. On the one hand, active strategies of buying and selling shares by these investors may contribute to moving stock prices away from their fundamental values. On the other hand, if all institutional investors react to the same information in a timely manner, they are in fact helping to increase market efficiency by speeding up the adjustment of prices to new fundamentals (for competing theories on the role of institutional investors, see, e.g., Lakonishok, Shleifer, & Vishny, 1992). This view of institutional investors as “efficiency drivers” generated considerable debate for many years (see, e.g., Ferreira & Laux, 2007; French & Roll, 1986).

Details

Institutional Investors in Global Capital Markets
Type: Book
ISBN: 978-1-78052-243-2

Abstract

Details

The Exorbitant Burden
Type: Book
ISBN: 978-1-78560-641-0

Book part
Publication date: 7 October 2011

James P. Hawley

Andrew Williams and I have argued since the early 1990s that not only have equity (and subsequently most other assets classes) come to be dominated by institutional ownership of…

Abstract

Andrew Williams and I have argued since the early 1990s that not only have equity (and subsequently most other assets classes) come to be dominated by institutional ownership of various types, an observation that many have made and documented at length, but that the majority of those institutions are fiduciary ones (primarily pension and mutual funds in the United States). More recently pension and mutual funds have been the source of the majority of funds for many ‘alternative’ investments, such as hedge funds, private equity and commodity funds. In the last two decades there have been parallel developments in other countries, although the form of the institutional investors vary widely, from fiduciary ones mostly in common law countries to fiduciary-like ones in many civil law jurisdictions (e.g. the Netherlands), to some sovereign wealth funds (e.g. Norway and Australia and some others) which do not have fiduciary obligations as such, but in their legal mandates and practices are structured much like those that are fiduciary or fiduciary like. As discussed below, all these (in addition to some other large institutional owners) are universal owners, that is, they own a representative cross section of their investment universe (which increasingly is a global universe). Given their ownership structure characterised by a large degree of diversification, universal owners' long-term interests to a large degree coincide with the economy as a whole.

Details

Finance and Sustainability: Towards a New Paradigm? A Post-Crisis Agenda
Type: Book
ISBN: 978-1-78052-092-6

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