Monitor Group, one of the worlds leading advisory and consulting firms, releases Assessing the Risks: The Behaviors of Sovereign Wealth Funds in the Global Economy, a first-of-its-kind report analysing the actual behaviours and financial transactions of sovereign wealth funds (SWFs).
Compiled in an effort to use fact-based research to move beyond stereotypes and common assumptions related to sovereign wealth funds intent, the report challenges widespread beliefs on the economic and political motives behind sovereign investments. Today, the biggest concentration of SWFs by dollar volume is in the Middle East and East Asia, and their increasing direct investment activity is causing concern in some recipient countries.
Drawing on their analysis of publicly-reported equity market transactions involving SWFs since January 2000, Monitor Groups key findings include:
The investment behavior of SWFs to date suggests the funds are driven primarily by financial objectivesthey do not appear to be investing for political motives. While some funds are making strategic investments to hasten economic development in their home countries, Monitor Group has found no evidence that SWFs, especially the highly scrutinized Middle East and East Asian funds, are active in ways that threaten the economic or national security of the countries where they invest. Investments in transportation, defense and aerospace, and high technology make up less than one percent of the value of deals in Monitor Groups data base
SWFs do take controlling stakes in companies. In contrast to prevailing views, half of publicly-acknowledged SWF transactions since 2000 resulted in majority-stake acquisitions. However, by far most of these transactions have occurred in domestic and emerging markets and in sectors such as consumer products and services and industrials not generally considered politically-sensitive.
A few large transactions in financial services during the credit crunch of 2007-2008 have created the perception that SWFs are targeting investments in OECD countries. Monitor argues that these transactions are opportunistic rather than strategic and that consideration of the total record of SWF investing since 2000 reveals that SWFs invest more actively in domestic and emerging markets than in OECD countries.
SWFs are taking progressively greater financial risk into their investment portfolios by investing in less conservative asset classes and, slowly, emerging markets. Most SWFs are adjusting their portfolios to combine conservative and relatively liquid asset classes such as government bonds with higher-risk, liquid assets such as equities, real estate, and alternative instruments. As global economies work through the current credit crisis, SWFs provide much needed liquidity to the global financial system.
We have seen a glut of opinion about the danger sovereign wealth funds present to the Western world in terms of political and economic influence. However, these fears are based on very little evidence, says Mark Fuller, chairman, Monitor Group. This report provides the first unbiased, factual look at the true nature of these investments and provides a much needed balance in current debates about transparency, legislation and codes of conduct.
The report also includes Monitor Groups portrait of the future landscape in which SWFs will participate in global financial markets. Monitor Group believes that three key trends will play out over the next five years: SWFs will become fixtures in global financial markets, SWFs will continue to invest in higher-risk asset classes, and legislators and policy makers in major capitals will continue to push for regulatory action in response to SWFs.
The report also cites two critical uncertainties that will play vital roles in determining SWFs future participation in global financial markets:
The extent to which SWFs pursue financial ends as opposed to geo-strategic ends driven by their sovereign governments: Monitor Groups analysis has shown that foreign governments are not using these funds as tools of foreign policy, but rather for financial gain. As such, these governments have clear financial incentive to continue to work within the existing architecture of the global financial system and not undermine it by attempting to use SWFs to gain overt political influence. A more likely risk is that a SWF could introduce an unacceptable degree of financial risk into another countrys market through an overly aggressive investment strategy.
The extent to which regulation occurs at the nation-state level or is coordinated globally: Political leaders around the world are already calling for a review of regulations for SWFs and a plethora of initiatives and reviews are under way. Some nations will institute regulation of SWFs, while some funds will voluntarily adopt codes of conduct designed to allay concerns about politically-motivated investing. Monitor believes coordinated multilateral regulation of SWFs is unlikely in the next few years.
To reach these conclusions, Monitor Group collected and investigated data on 1,181 sovereign wealth fund transactions involving 25 funds from 1975 through March 2008 compiling the most complete source of publicly-disclosed sovereign wealth fund transactions assembled to date. To allow for more comprehensive analysis, filters were applied to the data, leaving 17 funds, with a total of 785 deals and $251 billion of investments made between 2000 and 2008. The bulk of these transactions originated in the Middle East and Asia.