The article by Shai Bernstein, Josh Lerner, and Antoinette Schoar is devoted to the issues of sovereign wealth funds (SF). The authors use the history of SF and analyze the current situation through original quantitative research.
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The authors begin with an overview that demonstrates that there exist up to 70 SF, with the 20 biggest ones encompassing 90% of the total SF asset (Bernstein, Lerner, and Schoar 220). SF are founded on various sources, including resources (like petroleum), state-owned property selling revenue or trade surpluses. SF are characterized by rapid growth (have grown ten times in the past two decades), a great part of which is attributed to the oil prices (the article was created in 2013).
The goals of an SF are often multiple: it is a reserve of capital meant for the future generations (which is particularly important for the resource-based SF), a stabilizing tool for the government revenues (similarly important for undiversified economies and in the crisis situations), and as a “holding company” for the government’s investments (Bernstein, Lerner, and Schoar 222). The authors also point out the potential of the SF to accumulate the “sudden” wealth and prevent its mismanagement.
The issue that the authors mention in relation to SF deals with the fact that SF is often used to support various domestic businesses, which introduces the challenge of making a politically and economically correct decision. The authors analyze the publicly available data for 29 SF and come to the following conclusions concerning this challenge. The SF with politician involvement are indeed more prone to making economically less attractive decisions, that, however, tend to be “strategic”, that is, aimed at the country’s industry development at large. This factor is reflected in the tendency to invest in home industries and, especially, in the underperforming ones.
At the same time, these tendencies are not totally universal, and some variations do exist. As such, some SF are aimed at long-term development, and others are concerned with short-term objectives (for example, the acquisition of companies). Still, in either case, long-term return maximization is not characteristic of politically-driven SF, and this is the primary conclusion of the authors. Apart from that, SF can be managed externally, and in this case, the author claim, SF are more likely to invest abroad and their preferences are more economically attractive.
Having demonstrated the effects of political influences on economics-related choices in SF, the authors mention other challenges of the funds. One of them is transparency that is being demanded nowadays by the public (due to the increasingly public transactions of the funds and their growth), and that is being avoided by the government (possibly, as a result of fear of imitation or the understanding of the importance of the related decisions).
The other difficulty is concerned with the effective management of the growing SF and their returns, and it primarily stems from the enormous size of SF that puts it in a specific position and demands specific strategies. The authors mention the following coping strategies: avoiding illiquid markets and alternative assets (which lowers the required skill of the investor) as one extreme, heavy exploitation of private funds and direct investment as the other one, and building a structure of smaller funds for different investments and experimenting as an option that combines the two previous ones. Still, according to the authors, the question of the most attractive strategy of dealing with the SF issues remains open.
Bernstein, Shai, Josh Lerner, and Antoinette Schoar. “The Investment Strategies Of Sovereign Wealth Funds.” Journal of Economic Perspectives 27.2 (2013): 219-238. American Economic Association. Web.