A study by two academics from the University of Verona, who looked at four years of information on sovereign wealth funds, have concluded that these institutional investors behave differently, often for political reasons, but only in the short term.
In the medium-to-long term, SWFs invest in much the same way as the big pension funds and other institutional investors, say the Italian academics, Andrea Paltrinieri and Flavio Pichler, in a recently published paper. They looked at the investment data of 56 SWFs between 2007 and 2010 – admittedly difficult years and arguably non-representative of more “normal” times.
During the early part of the financial crisis at least, the information shows, SWFs had a lot more transactions in general than other types of funds and the transactions included many which appeared to be designed to recapitalize the Western banking system. The SWFs seemed to be investing alongside their government owners, compared with the more marginal activities of pension funds and mutual funds looking at distressed opportunities.
Generally, over the longer term (as much as the information allowed a comparison) the difference between investment strategies of SWFs and other institutional investors was not marked. SWFs
The paper says: “SWFs with medium- to long-term investment horizons used more aggressive asset allocation strategies, increasing the equity component in such a way as to exploit the potential advantages of the equity risk premium and increasing investments in alternatives, to achieve extra performance through illiquidity premiums. Certain distortions detected in the portfolios of institutional investors, such as home bias, also affected SWFs.