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.
Taming Leviathan: Mitigating Political Interference in Sovereign Wealth Funds’ Public Equity Investments
Extant research finds 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. We investigate the determinants of this “SWF discount” and mitigating mechanisms. We find that the discount is deeper for domestic investments and for SWFs from non-democratic countries, suggesting it is caused by the threat of political interference. While SWFs from non-democratic countries experience larger discounts, lower profitability, and lower valuation when signaling an active stance (buying large stakes, acquiring control, and investing directly), the opposite is true for SWFs from democratic countries.
Sovereign Wealth and Pension Fund Issues
Sovereign Wealth Funds (SWFs) are pools of assets owned and managed directly or indirectly by governments to achieve national objectives. These funds have raised concerns about: i) financial stability; ii) corporate governance and iii) political interference and protectionism. At the same time governments have formed other large pools of capital to finance public pension systems, i.e. Public Pension Reserve Funds (PPRFs). SWFs are set up to diversify and improve the return on foreign exchange reserves or commodity revenue, and to shield the domestic economy from fluctuations in commodity prices. PPRFs are set up to contribute to financing pay-as-you-go pension plans. The total of SWF pools is estimated at around USD 2.6 trillion in 2006/7, and is getting bigger rapidly, owing to current exchange rate policies and oil prices. The total amount for PPRFs is even larger, around USD 4.4 trillion in 2006/7, if the US Trust Fund is included (USD 2.2 trillion if excluded). SWFs and PPRFs share some characteristics, hence give rise to similar concerns. However, their objectives, investment strategies, sources of funding and transparency requirements differ. There is concern about strategic and political objectives of SWFs, and their impact on exchange rates and asset prices. But SWFs also provide mechanisms for breaking up concentrations of portfolios that increase risk. Enhancing governance and transparency of SWFs is important, but such considerations have to be weighed against commercial objectives.