A Portfolio Analysis Of Sovereign Wealth Funds
Christopher Balding The Milken Institute University of California, Irvine 1250 Fourth Street Santa Monica, CA 90401 cbalding@milkeninstitute.org
DRAFT COPY ONLY PLEASE DO NOT CITE OR CIRCULATE WITHOUT AUTHORS PERMISSION
The author would like to thank Glenn Yago, Jim Barth, Ed Phumiwasana, and Daisy Elliott for the comments. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. The opinions and analysis offered to not necessarily represent the view of the Milken Institute.
Abstract Sovereign wealth funds have been subject to much hype and little factual analysis. This study attempts to address the lack of factual analysis by combining both direct and indirect statistics to secure a more reliable understanding of how sovereign wealth funds invest and their impact on international finance and investment. The study comes to three conclusions. First, based upon the facts and analysis presented here, there is little reason to believe that sovereign wealth funds are large relative international investors or have a large impact on international financial markets. Second, sovereign wealth funds have to date acted as rational economically driven investors diversifying their portfolio by asset class and geographic region. Third, estimates of sovereign wealth funds inaccurately calculate their size by counting assets they exclude from other countries resulting in a misleading understanding of their size. Though countries would be wise to follow the development of sovereign wealth funds, the data does not currently support measures to restrict cross border investment.
-2-
Sovereign Wealth Funds and Portfolio Construction During the recent period of global growth and sound macroeconomic fundamentals, commodity based economies and countries with excess foreign exchange earnings accumulated large cash reserves. In an effort to avoid boom and bust cycles, sterilize...