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New Insights into Sovereign
Wealth Funds:Clues and Mysteries
Josh Lerner
Harvard Business School
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Important questions
Where are sovereign wealth funds investing?
How successful have these investments been?
What drives the key differences in sovereignfund performance? Critical because of
Size.
Future growth. Role in economic development.
Politicians concerns.
Potential to supplant other intermediaries.
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Limited insights
Relative limited information on groups and
their activities.
Secrecy as a response to political controversy.
Secrecy as an optimal investment strategy.
At same time, lack of clarity can unwarranted
suspicions and doubts.
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But recent insights
In last year, flurry of research into sovereign
funds:
About one dozen papers released.
Have illuminated many aspects.
Have exploded a number of myths about these
funds.
But leave a number of open issues.
This talk will highlight the key new insights
from these works.
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The agenda
A (very brief) history.
The new insights and surprises.
The open questions where research can addvalue.
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Early days
Pioneering awareness of Kuwait and others in
1950s of need to prepare for the future.
Variety of roles:
Sources of capital for future generations:
Like a university endowment.
Provides an ability to smooth out cycles in
commodity prices.
Holding company for strategic investments by
government.
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Very different outcomes
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Very different outcomes (2)
Kiribati:
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Significant players
40-70 funds, depending on how you count.
$3.5 trillion of assets:
Morgan Stanley estimate, mid-2008.
Big relative to hedge funds ($1.4 trillion).
Only 1.2% of all investible assets world-wide:
But rapid growth projected.
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Insights from recent research
Sovereign fund investments are good news for
targets.
Many concerns about investment strategies
misplaced.
Appear not to change firms in their portfolios.
The troubled track record of domestic
investments.
The importance of fund governance.
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1. Sovereign fund investments are
good news for the target firms
Dewenter, Han and Malatesta [2009] look at
196 purchases and 47 sales of stock by SWFs.
Adjusted stock price rises on news of
purchase:
Stock price up 1.7% on announcement.
The bigger the stake, the more positive a
reaction to a point.
Sales trigger a 1.3% drop.
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Reaction around stock purchase
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Evidence
Miracky, et al. (2009): Sovereign funds primarily focus on emerging markets,
not developed nations.
Real estate and old economy industrial firms have
been among most popular sectors. Appear to deliberately avoid sensitive industries and
firms.
Chhaochharia and Laeven (2009):
Sovereign funds tend to invest in countries with similar religion and culture.
with different industries than those in home country.
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3. Little support for claims of
distortions at portfolio companies
Many complaints that SWFs may distort firms
in unseen ways.
Sovereign wealth funds are their own worst
enemies. Most are not transparent or publicly
accountable, and we know little about their
governance structures or fiduciary controls. Senator Charles Schumer, Joint Economic Committee,
February 13, 2008.
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Change in P/E ratio in country and
industry in year after investment
P/E change
after domestic
investment
P/E change
after foreign
investment
Asian
sovereign
funds
-4.3 +0.7
Middle East
sovereign
funds
-5.3 -0.9
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Troubling domestic performance
Asian and Mid-Eastern funds have negative
industry P/E returns in year after deal at home
(though about zero abroad):
Similar results hold for the returns of the subset
of publicly traded firms.
Moreover, since many investments made at
relative peak, unlikely to be rescuingcompanies.
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5. The funds organizational
structure matters a lot
Can governance structures help to explain the
differences in investments across SWFs?
Would like to look at a broad array of measures.
For now, focus on whether political leaders
involved in the decision-making:
Data collected by JP Morgan as of 2008.
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Example: Alaska Permanent Fund
Emil Notti, appointed February, 2007Emil Notti is an engineer, prominent Alaska Native leader and Alaska public servant. He
graduated from Northrop University with a dual degree in aeronautical and electrical
engineering, and also holds an Honorary Doctorate degree from the Alaska Methodist
University. He was first president of the Alaska Federation of Natives, past president of
Doyon Limited, former Commissioner of the Department of Community and Regional
Affairs; 30-year board member with the National Bank of Alaska; and Veteran of the
United States Navy. In February, 2007,Governor Palin appointed Mr. Notti Commissioner
of the Department of Commerce, Community and Economic Development, and to serve
on the APFC board. Mr. Notti also held his commissioner's position, and served on the
APFC Board, from1985 to 1986.
Steve Rieger, appointed July, 2009
Steve Rieger currently operates his own management and finance consulting businesses
in Anchorage, and is a state-registered investment adviser. He earned a bachelors
degree in economics from Harvard University, and a masters degree in business
administration from Harvards Graduate School of Business Administration. Mr. Riegerserved three terms in the Alaska House of Representatives and one in the Senate,
representing south Anchorage. A member of both House and Senate finance
committees, his extensive legislative experience included the state operating and capital
budgets, economics, banking, and the Permanent Fund. As a legislative staffer before his
election, Rieger helped develop the legislation establishing the Alaska Permanent Fund
Corporation, and worked with Wall Street firms regarding its investment guidelines and
governance. He was appointed to the APFC board in July, 2009 by Governor Palin, for a
four-year term.
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Example: Alaska Permanent Fund
Emil Notti, appointed February, 2007Emil Notti is an engineer, prominent Alaska Native leader and Alaska public servant. He
graduated from Northrop University with a dual degree in aeronautical and electrical
engineering, and also holds an Honorary Doctorate degree from the Alaska Methodist
University. He was first president of the Alaska Federation of Natives, past president of
Doyon Limited, former Commissioner of the Department of Community and Regional
Affairs; 30-year board member with the National Bank of Alaska; and Veteran of the
United States Navy. In February, 2007,Governor Palin appointed Mr. Notti Commissioner
of the Department of Commerce, Community and Economic Development, and to serve
on the APFC board. Mr. Notti also held his commissioner's position, and served on the
APFC Board, from1985 to 1986.
Steve Rieger, appointed July, 2009
Steve Rieger currently operates his own management and finance consulting businesses
in Anchorage, and is a state-registered investment adviser. He earned a bachelors
degree in economics from Harvard University, and a masters degree in business
administration from Harvards Graduate School of Business Administration. Mr. Riegerserved three terms in the Alaska House of Representatives and one in the Senate,
representing south Anchorage. A member of both House and Senate finance
committees, his extensive legislative experience included the state operating and capital
budgets, economics, banking, and the Permanent Fund. As a legislative staffer before his
election, Rieger helped develop the legislation establishing the Alaska Permanent Fund
Corporation, and worked with Wall Street firms regarding its investment guidelines and
governance. He was appointed to the APFC board in July, 2009 by Governor Palin, for a
four-year term.
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Sovereign fund investment type
and performancePoliticians on
Investment
Committee
Politicians Not on
Investment
Committee
Share of deals in home
country 44% 31%Share of deals in home
country or region75% 60%
Average deal size($MMs) 190 148
Change in P/E ratio in
industry and country
in year after deal
-2.6 -0.8
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Governance and investment
choices
SWFs are more likely to invest at home if
politicians are involved in investments
Politician-influenced SWFs:
Invest in industries with higher P/E ratios.
Obtain a negative change in industry P/E
the following year.
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Open issues where research can
add value How to should respond to changing conditions:
E.g., natural resource price changes and investmentstrategies?
What are consequences of more transparencyabout investment strategies?
What incentive schemes are best at attractingand retaining professional staff?
How can continue to generate returns as growlarger?
Particularly challenging in alternative investments.
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Taking stock
So far, much of research has told us what we
know already.
But important because it provides
Ammunition to address critics.
Underlines areas where opportunities to change.
But more work is surely needed:
Much of which should be more useful to funds.
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Josh LernerRock Center for Entrepreneurship
Harvard Business School
Boston, MA 02163 USA
1-617-495-6065
www.people.hbs.edu/jlerner
mailto:[email protected]://www.people.hbs.edu/jlernerhttp://www.people.hbs.edu/jlernermailto:[email protected]