The Role Of Sovereign Wealth Funds As Activist Or Passive Fund Managers

Mark Mietzner

Zeppelin University; Department of Business Administration, Economics and Law

Dirk Schiereck

Darmstadt University of Technology

Denis Schweizer

Concordia University

August 30, 2015

Forthcoming, Journal of Asset Management


Sovereign Wealth Funds (SWF) have attracted a lot media attention with recent investments in publicly listed companies. Repeatedly, concerns have been raised, such as the fear of industrial espionage or geopolitical threats. We analyze whether SWF managers acquire stakes in foreign publicly listed firms 1) to play an active role which would support concerns or 2) passively select investments to increase the portfolio diversification, for instance. We find that SWF target firms are more profitable, pay higher dividends and have a higher financial stability than their industry peers. This is in line with SWF managers passively seeking for further portfolio diversification in foreign public equity markets. We cannot find an improvement in operating or market performance after the engagement of SWF. Overall, our results indicate strong evidence that SWF managers primarily act as passive investors instead of pursuing activism strategies like private equity funds.

The Role Of Sovereign Wealth Funds As Activist Or Passive Fund Managers – Introduction

Johan at al. (2013) characterize sovereign wealth funds (SWF) as particularly interesting because of their potential interactions between mission and ownership. The investment charters of SWF typically require them to maximize financial returns while at the same time they are influenced by political decision makers to support their political agenda. Barber (2006) and Jiao and Ye (2013) use similar arguments to describe the ambivalent position of US public pension funds (PPF) like CalPERS. They both refer to the discussion on incentives to shareholder activism on the one side and political pressure to deviate from shareholder value maximization on the other.

While some studies perceive SWF to be similar to PPF as (potential) activist investors Bodie and Brière (2014) give them a more passive role. However, the clarification of the dominant investment approach is important for the interpretation of announced transactions by this type of investors and for the regulative surveillance of SWF (see also Johan at al., 2013). The more activist SWF act, the closer the regulators might monitor them. The average assets under management of SWF are by far larger than those of PPF which raises doubts about an unadjusted transfer of evidence from PPF to SWF. Courturier et al. (2009) are more in favor of an activist investment perspective when they discuss the abilities of SWF as lenders for cash-strapped companies during the financial crisis. By contrast, Bodie and Brière (2014) take a more passive perspective on SWF engagements. The authors propose that SWF managers select their investments from a pure asset allocation perspective instead from actively influencing managerial decisions in their targets.

Gospel and Pendleton (2014) and Vitols (2014) compare the impact of hedge funds, private equity funds and SWF investments on labor markets and work organizations. They refer to empirical evidence about pressures from private equity investors for restructuring and value transfer that often leads to changes in employment. However, there is a lack of empirical evidence whether SWF act similar or behave more passively and the consequences of SWF investments on the domestic labor markets of the target firms remains unclear. Thus, the transparency on the activist or passive role of SWF becomes important for politicians, unions and regulatory authorities. Our paper builds on the idea of Johan et al. (2013) who are also interested in determining whether or not SWFs invest with political motivations in mind. Our approach differs in that we only focus on listed companies and examine capital market reactions, which we argue are the most unambiguous and direct parameters to address the research question.

Sovereign Wealth Funds

Sovereign Wealth Funds

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