Investment strategies of sovereign wealth funds

Abstract

The project aims at analyzing the investment strategies of three sovereign wealth funds (SWF) namely Norway pension fund, Temasek and Kuwait investment authority. The extremely large sizes of these funds help them take risky bets such that even if the strategies diverge significantly, the calculated risk taken helps them earn a sizable return on investment. Although there has been no incidence of a downward spiraling of asset prices due to an SWF pulling out its investment (except during a major crisis), the investments are still large enough to potentially influence the discourse of the sectors invested. This project helps in identifying the broad trends of strategies and actions taken by the three SWFs. The analysis of the above three sovereign funds, on parameters like AUM growth, sector allocation, asset class distribution and portfolio liquidity, elucidates some clear shift in their investment philosophy and risk-taking capabilities. All the three funds have been gradually shifting funds out of their origin countries towards other developed and emerging economies. The analysis also showed that unlike the majority thinking, SWFs do not pull all their investments from a particular asset class during the times of crisis. In fact, it is quite the opposite as some of these funds do take positions in certain assets at very attractive valuations during a flash asset sale by other institutional investors. These funds have also been shifting their allocation towards riskier markets, of emerging and frontier economies, and unlisted assets to chase higher returns in a world where the global interest rates are extremely low. As a result of these, their investment philosophy is now also looking increasingly at emerging sectors like technology and venture capital space as they are now also in search of early stage startups which have the potential of becoming unicorns. A comparison of these three funds has also been analyzed in detail across parameters like sources of funds, usage of funds, the level of political influence that their governments have on them, the governance structure and investment asset class. The analysis shows that Temasek’s structure and philosophy is more like any other investment firm while in the other two, Norway and KIA, the government does have some influence over them wherein they overlook the commercial interests. We find that the subsequent growth of the AUM of the funds are based on varying philosophies as Norway pension fund believes in investing in listed and proven companies’ equity and government securities for fixed income, SWFs like Temasek have been increasing the allocation to unlisted equities unlike Temasek which not only invests in real estate directly but also in alternative investments like venture capital space. They have been shifting their portfolio towards emerging market economies as well. All these large SWFs have been having a stronghold on many corporates in the world through their investments. Also, in recent years they have had a common attraction towards the emerging economies, early stage startups and other unlisted assets in search for higher returns in a low interest rate world.