SWFs: Activist Investors or Passive Stock Pickers?

Three academics investigate whether the world’s largest investors use their influence to enact change in the companies they hold.

Sovereign wealth funds (SWFs) are less likely to be activist investors than their institutional peers due to their size and legal restrictions, according to research.

The amount of money available to SWFs means their intentions when making investments are “important for politicians, unions, and regulatory authorities” to understand, wrote Mark Mietzner (Zeppelin University, Friedrichshafen), Dirk Schiereck (Darmstadt University of Technology), and Denis Schweizer (Concordia University, Montreal).

“Our evidence supports the view that SWF managers passively seek for stock picking in public equity markets instead of pursuing activism strategies.”However, their analysis of 147 companies owned by SWFs showed that these groups probably shouldn’t be too concerned with investors’ ulterior motives: the focus instead is on companies with “higher return on assets, dividend payments, and yields”.

In the paper—“The Role of Sovereign Wealth Funds as Activist or Passive Fund Managers”—the authors found that SWFs were more likely to be stock pickers focused on “high quality” companies. Mietzner, Schiereck, and Schweizer said this demonstrated that SWFs were typically passive investors, rather than engaging regularly with the companies they hold.

“Our evidence supports the view that SWF managers passively seek for stock picking in public equity markets instead of pursuing activism strategies,” the authors wrote.

This is despite evidence that activist shareholders can boost company performance—as Carl Icahn, Dan Loeb, and others can testify.

“Legal restrictions, and the fact that equity holdings of most SWFs exceed several hundred single positions in various countries and currencies, raise doubts about SWFs’ capacity for a genuine shareholder activism strategy,” the authors wrote.

The academics’ research did show that companies often see their stock perform strongly in the wake of a SWF investment. However, rather than attributing this to the positive influence of the investors post-purchase, Mietzner, Schiereck, and Schweizer hypothesized that positive performance was a reflection of “super stock picking qualities” within the funds.

“SWF investments reflect, at least in parts, valuable information about the target company or its industry,” the authors wrote. Citing previous research into this area, they added that sovereign funds “additionally might gain from having access to information about government actions”.

As a consequence, they said, the returns made through SWF decisions can reflect the information edge they hold when investing. 

The full paper is available to download from the Social Science Research Network.

Related: Inside Activist Hedge Funds & Is ADIA a Threat to Asset Management?