IFSWF Report on Compliance with the Santiago Principles: Admirable but Flawed Transparency
Sarah Bagnall and Edwin M. Truman examine the International Forum of Sovereign Wealth Funds (IFSWF) report, which claims to be "a solid, initial step toward a better understanding of the IFSWF and of the Santiago Principles," and find this to be largely true, with a few limitations. The report, released July 7, 2011, is a self-assessment of the voluntary compliance of 21 member sovereign wealth funds (SWFs) with the Generally Accepted Principles and Practices of SWFs, issued in October 2008. Bagnall and Truman find that the extent of compliance with the Santiago Principles is somewhat exaggerated. In addition, some of the 21 funds have substantially lower rates of compliance than others, which is not reported. However, the report is frank about many of the issues that arise with respect to the interpretation of its results, for example regarding the application of the principles on investment policies and on nonfinancial restrictions on SWF investment decisions. Ultimately, presentation may obscure some results in the IFSWF report, but Bagnall and Truman find the report credible and admirable.
The Sovereign Wealth Fund Discount: Evidence from Public Equity Investments
We document that announcement-period abnormal returns of sovereign wealth fund (SWF) equity investments in publicly traded firms are positive but lower than those of comparable private investments. Further, SWF investment targets suffer from declining return on assets and sales growth over the following three years. Our results are robust to controls for target and deal characteristics and are not driven by SWF target selection criteria. Larger discounts are associated with SWFs taking seats on boards of directors and with SWFs under strict government control acquiring greater stakes, supporting the hypothesis that political influence negatively affects firm value and performance.
Sovereign Wealth Funds: The Need for Greater Transparency and Accountability
Management of official holdings of foreign assets, in particular in sovereign wealth funds, has become a major focus of national and international economic and financial policy. The principal reasons are their size, lack of transparency, potential to disrupt financial markets, and the risk that political objectives might influence their management. Moreover, such large cross-border holdings in official hands are at sharp variance with today's market-based global economy and financial system. These investment activities of governments have become sufficiently significant that an internationally agreed standard should be established to guide these activities. The standard should apply to the gamut of international investments of governments, including traditional foreign exchange reserves, stabilization funds, nonrenewable resource funds, sovereign wealth funds, and government-owned or controlled entities such as pension funds. The standard should ensure that international investments of governments are based on clearly stated policy objectives and investment strategies. It should set out the role of the government and the managers of the investment mechanism/entity and ensure that the operations of the investment mechanisms are as transparent as possible. Depending on the type of mechanism, its size, and the scope of its activities, behavioral guidelines with respect to its management should be established. Such a standard would contribute not only to financial stability in the countries directly involved but also to international financial stability by increasing the transparency, accountability, and predictability of the operations of governments in managing their international investments and discharging their obligations to current and future generations.