Sovereign Wealth Funds and Long-Term Investing

Sovereign Wealth Funds and Long-Term Investing

PATRICK BOLTON
FREDERIC SAMAMA
JOSEPH E. STIGLITZ
Copyright Date: 2012
Pages: 288
https://www.jstor.org/stable/10.7312/bolt15862
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  • Book Info
    Sovereign Wealth Funds and Long-Term Investing
    Book Description:

    Sovereign Wealth Funds (SWFs) are state-owned investment funds with combined asset holdings that are fast approaching four trillion dollars. Recently emerging as a major force in global financial markets, SWFs have other distinctive features besides their state-owned status: they are mainly located in developing countries and are intimately tied to energy and commodities exports, and they carry virtually no liabilities and have little redemption risk, which allows them to take a longer-term investment outlook than most other institutional investors.

    Edited by a Nobel Laureate, a respected academic at the Columbia Business School, and a longtime international banker and asset manager, this volume examines the specificities of SWFs in greater detail and discusses the implications of their growing presence for the world economy. Based on essays delivered in 2011 at a major conference on SWFs held at Columbia University, this volume discusses the objectives and performance of SWFs, as well as their benchmarks and governance. What are the opportunities for SWFs as long-term investments? How do they fulfill their socially responsible mission? And what role can SWFs play in fostering sustainable development and greater global financial stability? These are some of the crucial questions addressed in this one-of-a-kind volume.

    eISBN: 978-0-231-53028-6
    Subjects: Business, Political Science, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-x)
  3. ACKNOWLEDGMENTS
    (pp. xi-xiv)
  4. Introduction
    (pp. 1-25)
    PATRICK BOLTON, FREDERIC SAMAMA and JOSEPH E. STIGLITZ

    Sovereign wealth funds (SWFs) have emerged as a new force on the global economic scene, with an estimated value of assets under management ranging from $3.5 to $4 trillion. To put this number in perspective, the aggregate market capitalizations of the Standard & Poor’s (S&P) 500 and European stock exchanges is currently of the order of $16 trillion. Some SWFs have been in existence for a long time, but until recently they mostly have been seen as somewhat quirky investment vehicles, and their idiosyncrasies made a systematic analysis of their objectives and policies difficult if not impossible. In recent years, however,...

  5. 1 Keynote Addresses
    (pp. 26-52)

    Sovereign wealth funds (SWFs) have emerged as a new, important player on the global economic scene with an estimated value of some $3.5 trillion. In these introductory remarks, I want to talk about the big picture implications of the larger profile of SWFs.

    The first thing to consider is the seemingly obvious—ownership is what makes SWFs different from other vehicles of investment. Differences in ownership can give rise to differences in objectives, behavior, and responses on the part of the host countries where the investments are made. As state-owned entities, they have a longer-term horizon than many investors. Their...

  6. 2 The State of Sovereign Wealth Funds
    (pp. 53-75)

    In the wake of the financial crisis, sovereign wealth funds (SWFs) have gained increasing attention as their assets under management have continued to grow significantly, to the extent that they hold an increasing fraction of publicly traded companies around the world. More than ever, they have become unavoidable investors in initial public offerings and banks’ offers of new equity capital. Although they are still considerably smaller than pension funds, SWFs manage assets in excess of private equity funds or hedge funds. Naturally, this has drawn renewed scrutiny over the appropriate institutional architecture for SWFs. Some commentators have Pushed for “greater...

  7. 3 Benchmarking and Performance Standards
    (pp. 76-105)

    The establishment of benchmarks and performance standards is crucial for a well-functioning sovereign wealth fund (SWF). Unlike other investment funds, such criteria are normally set by sovereign governments as opposed to private actors in the marketplace. While the rate of return might be a private fund’s primary focus, it may represent only one dimension of an SWF’s investment objectives. Designing effective metrics and organizational mechanisms is therefore even more important for SWFs given their multidimensional objectives. To address the complexities of benchmarking and standard setting, several factors need to be analyzed. First, it is important to determine why governments establish...

  8. 4 Fostering Development Through Socially Responsible Investment
    (pp. 106-121)

    Global imbalances in international capital markets are commonly identified as a major cause of the 2008 financial crisis. These imbalances are characterized by the investment of capital surpluses of large developing countries into equity and fixed-income markets in developed countries. This uneven distribution of global capital raises the question of how financial stability can be promoted through the development of deeper, more liquid developing country capital markets. Broadly defined, socially responsible investment (SRI) may be one mechanism for accelerating this transition. Indeed, the implementation of an SRI strategy requires finding the right balance between financial returns and environmental and social...

  9. 5 Expanding Investment Horizons: Opportunities for Long-Term Investors
    (pp. 122-160)

    Because of their large foreign reserves and low leverage, sovereign wealth funds (SWFs) are increasingly expected to get involved in a variety of domestic and international economic policy solutions. These include stabilizing financial markets, addressing global structural imbalances, making socially responsible investments, and fostering the transition to a low-carbon global economy. SWFs are naturally placed to take on some of these responsibilities due to their long-term investment horizon. By providing more insurance options to short-term financial markets, for example, SWFs would not only help stabilize financial markets but also obtain higher financial returns. Yet it is fair to say that...

  10. 6 Reducing Climate Risk
    (pp. 161-172)

    Along with the scientific consensus surrounding the existence of anthropogenic global warming, political and business leaders increasingly agree that immediate action should be taken to avert and mitigate the risks posed by climate change. Since the enormous range of players and interests complicates multilateral agreements on the provision of public goods, long-term investors should consider market-based options that may generate momentum toward an ultimate cooperative policy solution to reverse climate change. Sovereign wealth funds (SWFs) are a set of players that ought to be particularly concerned about their own strategy toward climate change, not only because of their long-term horizon...

  11. 7 Managing Risk During Macroeconomic Uncertainty
    (pp. 173-185)

    A central objective in setting up a sovereign wealth fund (SWF) is to protect the sponsor’s wealth and domestic economy against external shocks, such as fluctuations in exchange rates, shocks to external demand and supply, and sudden changes in international capital flows. One major source of global macroeconomic uncertainty, in particular, are global imbalances reflected in the huge debt burden and large current account deficits of the industrial world and the vast foreign exchange reserves in oil-exporting countries and emerging market economies. The growing size of cross-border borrowing and lending leads to complex dynamics of global capital flows and exchange...

  12. 8 Managing Commodity Price Volatility
    (pp. 186-203)

    In recent decades, energy prices have become more volatile relative to other commodity prices. While it is difficult to pin down what level of price volatility is clearly excessive, there is naturally a greater concern to find solutions that help stabilize energy prices, or failing that, to find better hedges against energy price volatility. In addition, the inexorable trend toward global warming is increasingly likely to bring about the introduction of significant carbon taxes. As many scholars have pointed out, the introduction of carbon taxes is likely to increase the costs of oil production, pushing down supply and therefore leading...

  13. 9 Sovereign Wealth Funds and World Governance
    (pp. 204-220)

    A focus on the domestic and international regulation and accountability of sovereign wealth funds (SWFs) highlights some challenging contemporary governance issues. Even though sovereign and private institutional investors have different ownership structures and may even pursue divergent investment objectives, common to both are themes such as transparency, principal-agent issues, and the relationship between states and markets. The Santiago Principles, an attempt at voluntary, internal regulation of investment practices and accounting standards by funds, are aimed at disclosure, investment based on risk and return, transparency and good internal governance, the stability of financial markets, and reducing protectionism against SWFs. Inconsistent implementation...

  14. CONCLUSION: TAKING STOCK—ANALYTICAL CHALLENGES AND DIRECTIONS FOR FUTURE RESEARCH
    (pp. 221-224)
    JOSEPH E. STIGLITZ

    Reflecting on this conference, I would like to make a general observation about the impressive research that has been done to help us understand what sovereign wealth funds (SWFs) have been doing and to provide insight into what these funds could or should do. I was impressed with the challenges of putting together the empirical databases on SWFs that were the foundation of several papers presented at the conference and the insights that the analysis of those databases provided.

    I will begin by focusing on what I see as the major theoretical and analytical challenges. If SWFs and long-term investors...

  15. CONTRIBUTORS
    (pp. 225-236)
  16. ABOUT THE CONFERENCE ORGANIZERS
    (pp. 237-238)