How Do You Manage
That Much Money?
Despite their apparent similarity in purpose, sovereign wealth funds (SWFs) manage their assets very differently. Some manage the fund from the central bank, others from the ministry of finance, and others establish quasi-independent bodies to run the SWFs. Some countries use all outside managers, and some retain asset management functions, while most use a combination. Some countries maintain stabilization fund objectives, others focus on economic development, and still others include intergenerational or ethical investment considerations. Some countries post regular updates about fund management and returns while others have legislation preventing any release of information about fund activities. There is a wide range of objectives and outcomes in how countries decided to manage their SWFs. Like a marketplace that contains diverse investors, sovereign wealth funds approach the management of national wealth with a variety of objectives and competing interests. What is less clear and has received less attention is how SWFs should invest their money. It is commonly assumed that sovereign wealth funds should invest like any other institutional investor but it is not clear that this is the appropriate response.
The interest in SWF asset-management activities has focused, to the detriment of related issues, on two separate but related issues. First, SWFs that manage capital on behalf of the citizens of a country should be judged according to standard financial benchmarks. Even legal research frames the behavior of SWFs and stateowned enterprises within the “reasonable private investor standard” (Backer 2009). The research to date indicates a mixed record of investment success by SWFs (Mietzner et al. 2008; Raymond 2008). This result, while disappointing to the government or the citizens of a country, should come as no real surprise, because financial theory holds that returns will be a random walk around a market index. The size and global diversity of SWFs imply that they will replicate a global capital return index depending on their specific allocation between asset classes. The question becomes whether there is any reason to believe that they can deliver superior returns. In fact, there is no basis in fact, theory, or logic that would imply that SWFs should earn excess returns. As noted, and will be studied in greater detail, due to their geographic and investment diversity, sovereign wealth funds replicate a broad basket of financial assets.