(October 4, 2012) – Do sovereign wealth funds (SWFs) act like other institutional investors?
That’s the question Andrea Paltrinieri and Flavio Pichler of the University of Verona set out to answer with their recently published study analyzing four years’ worth of data (2007 to 1010) for 56 SWFs.
They concluded that in the long- and medium-term, SWFs invest based on the same factors as other institutional investors, including time horizon, equity risk premium, illiquidity premium, and home bias. SWFs’ investing habits particularly mirrored pension and mutual funds, Paltrinieri and Pichler found.
“SWFs with medium- to long-term investment horizons used more aggressive asset allocation strategies, increasing the equity component in such a way as to exploit the potential advantages of the equity risk premium and increasing investments in alternatives, to achieve extra performance through illiquidity premiums,” the commerce/economics researchers wrote. “Certain distortions detected in the portfolios of institutional investors, such as home bias, also affected SWFs.”
In the short-term, however, SWFs pursue goals other than portfolio optimization. Namely, they have and follow political objectives.
During the financial crisis, for instance, the data showed a marked increase in quantity and value of funds’ transactions. Paltrinieri and Pichler contend that these actions were mainly to recapitalize the Western banking system hit by the crisis. “Such operations were carried out parallel to government recapitalization operations to stave off defaults, given the vast liquidity of SWFs in the period 2007-2008,” they assert. “Moreover, the fact that participation in banking recapitalization operations by mutual funds and pension funds was marginal in relation to the massive interventions by governments and SWFs may well indicate that SWF strategies are not dictated solely by the pursuit of financial gain.” Rather, in the short term, SWFs often operate in concert with their government’s goals.
Unlike other types of institutional investors, Paltrinieri and Pichler the activities SWFs undertook during the financial crisis indicate that they can operate as stabilizers of financial markets.
In this highly volatile environment, few would argue with the benefits of enormous funds motivated to act as ballasts during times of financial upheaval. But other researchers contend that SWFs’ political objectives can extend much further than economic stability.
Read the entire paper here.