TAILIEUCHUNG - Sovereign Wealth Funds: Their Investment Strategies and Performance

Over time, social funds have proven that they effectively can coordinate among entities, channel resources, develop social infrastructure, pro- mote the participation of local authorities and the community, and inte- grate the private sector and civil society in their programs. Their trans- parency in operations is widely acknowledged and has resulted in financial and technical support from international entities. Impacts of social funds are commensurate with the budgets that are allocated to them. Although their achievements have been considerable, the magni- tude of poverty, especially in the poorest economies of Latin America and the Caribbean, remains overwhelming | Sovereign Wealth Funds Their Investment Strategies and Performance Vidhi Chhaochharia University of Miami and Luc Laeven International Monetary Fund CEPR and ECGI August 31 2008 Abstract Sovereign wealth funds have emerged as an important investor of global equity attracting growing attention. Despite concerns that sovereign wealth fund investments may serve political objectives and be in conflict with national interests little is known about the investment objectives and performance of sovereign wealth funds. We collect new data on foreign equity investments by sovereign wealth funds. We find that sovereign wealth funds largely invest to diversify away from industries at home but that they do so predominantly in countries that share the same culture suggesting their investment rules are not entirely driven by profit maximizing objectives. Share prices of firms respond favorably when sovereign investment funds acquire stakes in part because these investments often take place when firms are in financial distress. However the long-run performance of equity investments by sovereign wealth funds tends to be poor consistent with imperfect portfolio diversification and poor corporate governance. JEL classification codes G3 Keywords Sovereign wealth funds Asset allocation Corporate governance Corresponding author Luc Laeven Senior Economist Research Department International Monetary Fund 700 19th Street . 20431 Washington DC. Tel. 202-623-9020. Fax 202-623-4740. E-mail llaeven@. We are grateful to numerous colleagues at the International Monetary Fund for useful discussions and comments. We would like to thank Supreet Arora and Masha Galeb for excellent research assistance. This paper s findings interpretation and conclusion are entirely those of the authors and do not necessarily represent the views of the International Monetary Fund its Executive Directors or the countries they represent. 1. Introduction Sovereign wealth funds SWFs have emerged as an important

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