Oxford SWF Project

Ashby Monk

Miracky et al. at Monitor Group have released another SWF report this week. As the title suggests, it has quite a bit of detail on SWF investment behavior. The data are drawn from various public and fee based services and are representative of Monitor’s more restrictive definition, which only picks up 31 funds (as opposed to, say, the 50+ funds tracked by SWF Institute). Still, it is well worth reading.

Of particular interest is the illustration of the shift in SWF investments from foreign back to domestic markets after the financial crisis. Using their data, we can see that around 18% of SWF investments were in domestic countries for 2006, 2007 and the first two quarters of 2008. In other words, 82% of SWF investments were heading out into foreign countries. This seems reasonable for a well diversified fund. However, once the financial crisis hit, the mix between foreign and domestic changed dramatically. For the last two quarters of 2008 and the first quarter of 2009, domestic investments jumped to roughly 40%. What drove this sudden increase of 22%?

Before speculating, it is important to note that these are investments in companies, so this shift does not reflect sponsoring governments using SWF assets for budgetary purposes during the financial crisis. Governments drawing down on SWF assets during the crisis is a separate issue. So this begs the question: why did these funds decide that domestic economies were suddenly more appealing than foreign markets? Was it based on commercial criteria (e.g. currency risks, ‘cheap’ assets, information asymmetries, etc.) or was it based on political criteria (saving jobs and bolstering domestic corporations).

I think in the case of SWFs there are good arguments to say that both would be legitimate. However, if the sponsoring government can tell the SWF to invest in domestic firms that are struggling (i.e. politicians engaging in stock picking), then these SWFs can’t claim to be purely commercial investors. So these statistics may create some concern among western policymakers, if only to raise suspicions that governments have more influence over SWF investment decision-making then they let on.

This issue is particularly toxic in the US. Take as an example the much derided investment by the State of Connecticut Pension Fund in the local firm, Colt Firearms, to save jobs at a politically precarious time. This specific investment has played a large role in preventing the establishment of a SWF to invest the US SSTF (and more generally has prevented any diversification of the SSTF). In short, the fear is that a US SWF would be vulnerable to political influence in times of political and economic crisis, which is seen as illegitimate.

So back to the sudden increase of domestic investments by SWFs during the crisis: Is this a case of politicians influencing SWF investments or a case of SWFs seeing great investment opportunities at home? I simply don’t know. And as I said before there are solid arguments for both being legit (this is after all government cash, not pension cash, so why not use it for the benefit of the country during times of crisis). But some may see this as evidence for political influence over SWF investment decisions. Greater transparency would help to alleviate such concerns.