1887

OECD Development Centre Working Papers

The OECD Development Centre links OECD members with developing and emerging economies and fosters debate and discussion to seek creative policy solutions to emerging global issues and development challenges. This series of working papers is intended to disseminate the OECD Development Centre’s research findings rapidly among specialists in the field concerned. These papers are generally available in the original English or French, with a summary in the other language.

English, French

Are Sovereign Wealth Funds' Investments Politically Biased?

A Comparison with Mutual Funds

Global allocation of capital and fluctuations in asset prices are increasingly influenced by the activities of Sovereign wealth funds (SWFs). The Santiago Principles called for higher transparency, stressing that SWFs should exhibit clearer governance standards and sound portfolio management principles. Although asset allocation strategies for these funds are not known, SWFs are suspected to follow other factors besides risk-return objectives. This paper attempts to shed light on some of these concerns. The fear that sovereigns with political motivations use their financial power to secure large stakes in Western companies is shown to be unfounded. We find that SWF investment decisions do not differ greatly from those of other wealth managers. We propose to use mutual funds’ investments as a benchmark for SWF investment allocations. We collect data of SWF and mutual fund equity investment at the firm level and analyse these investments on a geographical and sector basis. Moreover, we compare target investments for these two groups by looking at the political regime in the sending and recipient country, under the hypothesis that this variable is not determinant for SWF investments. Finally, we provide a comparison of SWFs and other public funds based on governance features related to investment. We argue that double standards for regulation should be avoided and efforts to achieve higher transparency should be made by all investing actors.

English

Keywords: benchmarks, political regimes, regulation, asset allocation, sovereign wealth funds
JEL: F21: International Economics / International Factor Movements and International Business / International Investment; Long-term Capital Movements; G18: Financial Economics / General Financial Markets / General Financial Markets: Government Policy and Regulation; G11: Financial Economics / General Financial Markets / Portfolio Choice; Investment Decisions; O57: Economic Development, Innovation, Technological Change, and Growth / Economywide Country Studies / Comparative Studies of Countries
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