SWF_Diploma_thesis_2012

Sovereign Wealth Funds Sovereign Wealth Funds and and

their impact on international financetheir impact on international financeByBy

Antonia FICOVAAntonia FICOVA

Supervisor: Assoc. Prof. Juraj SipkoSupervisor: Assoc. Prof. Juraj Sipko

May 23, 2012May 23, 2012

Paneuropean University, Department of International Business, Bratislava

• Research ObjectivesResearch Objectives,,

• Research MethodologyResearch Methodology,,

• Literature Review,Literature Review,

• Asset Allocations,Asset Allocations,

• Swot Analysis,Swot Analysis,

• Hypotheses, Hypotheses, • Conclusions.Conclusions.

OUTLINE

Department of International Business, Paneuropean University, Bratislava, 2012

• What is the impact of growth ofWhat is the impact of growth of SWFs to financial SWFs to financial markets, to companies? What is the impact SWF´s formarkets, to companies? What is the impact SWF´s for the development of national economies and host the development of national economies and host countries?countries?

• Where are SWFs investing? Can governance structures Where are SWFs investing? Can governance structures help to explain the differenceshelp to explain the differences in investments across in investments across SWFs?SWFs?

• Did SWFs play an important role in the subprime crisis? Did SWFs play an important role in the subprime crisis? To what extent, areTo what extent, are SWFs accountable for contributing SWFs accountable for contributing to global imbalances?to global imbalances?

RESEARCH OBJECTIVES


• qualitative and quantitative analysis,qualitative and quantitative analysis,

• comparative research, comparative research,

• analytic, statisticalanalytic, statistical methods, methods,

• regression analysis, regression analysis,

• SWOT analysisSWOT analysis

• tthe ‘Student’ t-test, Chi-test, Pearson´s coeficient, he ‘Student’ t-test, Chi-test, Pearson´s coeficient, Cramerovo V, Cramerovo V,

• method of least squaresmethod of least squares MLS, analysis of variance MLS, analysis of variance ANOVAANOVA

• data collection instruments: primary source, secondary data collection instruments: primary source, secondary source, own observation and personal judgment.source, own observation and personal judgment.

RESEARCH METODOLOGY


• MonkMonk ( (20092009)) describes SWF´s as describes SWF´s as::

„„they are government-owned and controlled (directly or they are government-owned and controlled (directly or indirectly), have no outside beneficiaries or liabilities indirectly), have no outside beneficiaries or liabilities and that invest their assets, either in the short or long and that invest their assets, either in the short or long term, according to the interests and objectives of the term, according to the interests and objectives of the sovereign sponsorsovereign sponsor““

LITERATURE REVIEW


• Balin, B. J. Balin, B. J. (2008(2008)) presents presents why countries establish SWF why countries establish SWF´s´s::

„„...... is that, when the country’s natural resources are is that, when the country’s natural resources are exhausted, therefore, future generations can continue to exhausted, therefore, future generations can continue to live prosperously using the earnings of their forefathers.live prosperously using the earnings of their forefathers..... when a country is faced with a competitiveness crisis, it when a country is faced with a competitiveness crisis, it can call on its can call on its swfswf assets to reinvest in new sectors of the assets to reinvest in new sectors of the economy that can revive the country’s competitive economy that can revive the country’s competitive advantagesadvantages““

LITERATURE REVIEW


ASSET ALLOCATION OF SAVINGS FUNDSIN COMPARISON 2007 vs. 2011


Source: Author´s comparison, according to available data from SWFs websites, reports and authors' calculations.


ASSET ALLOCATION OF STABILIZATION/SAVINGS FUNDS

IN COMPARISON 2007 vs. 2011



ASSET ALLOCATION OF PENSION RESERVE FUNDS

IN COMPARISON 2007 vs. 2011



ASSET ALLOCATION OF RESERVE INVESTMENT FUNDSIN COMPARISON 2007 vs. 2011


We identified differences of observed funds:

• whereas savings funds have varying proportions of equities in their portfolios including debt (fixed income),

• cash figures are typically for stabilization SWFs, • funds with stabilization objectives usually do not invest in

alternative assets.

Examples show that research opportunities:

• to try to monitor and determine their investment strategies,• the mean-variance Markowitz model is a good starting point for

deriving a stabilization SWF’s optimal SAA.

CONCLUSIONS FROM INVESTMENT STRATEGIES


SWOT ANALYSIS


Source: Author´s analysis.

TESTING HYPOTHESIS I.


Source: Author´s calculations.

N=12 SWFs

The ‘Student’ t-test distribution with (N−1)

degrees of freedom

• showed an increase of SWFs in their returns, during period 2008 and 2010,

• their performances in 2010 could be caused through changes in their portfolios,

• due the fact of implementing different asset allocations after 2008,

• as a result of hypothesis, we rejected null hypothesis,

• and accepted an alternative hypothesis,

• that means this method showed an increase, what is a statistically significant.

CONCLUSION FROM TESTING HYPOTHESIS I.



TESTING HYPOTHESIS II. Part I.

The reliability is 95% and we determine mean the reliability of proportion equityThe reliability is 95% and we determine mean the reliability of proportion equity in asset allocation in SWFs.in asset allocation in SWFs.


N=12 SWFs


TESTING HYPOTHESIS II. Part II.


1

111

21

1

21 n

stx

n

stx

1

11

44,1620,208,44

11

44,1620,208,44

%9599,5417,33


degrees of freedom Two-sided confidence

%9521,35

95,011

44,1679,108,44

11

11

P

P

n

stxP


degrees of freedom Left-sided reliability

ns

xt

86,112

44,16

21,3508,44

=

t crit = 2,20

t crit = 2,20

two-sided t-distribution

is calculated by TINV

By using Methods Student's t-distribution and TINV showed:

• that proportion of equity in asset allocations in 12 observed SWFs supposed to be between 33,17 to 54,99 percent of total portfolios at 95 percent probability,

• by using next hypothesis we may say that deviation is caused by random selection of funds in observed file Z,

• therefore we accepted null hypothesis; 44,08=35,21;

• what is not statistically significant.


CONCLUSION FROM TESTING HYPOTHESIS II.


TESTING HYPOTHESIS III.


N=12 SWFs

Chinv test (χ2; degree of freedom

= 1)

Pearson´s coeficient

Cramer´s V

• between the funds and export earnings from commodities is statistical dependence,

• Chi-test showed, χ2>χ2crit, 255,65>3,84; that is statistical dependence between earnings from sources of the funds and total export of countries is statistical dependence,

• by using Pearson´s coeficient we determined that dependency is 0,210x4=0,84 for our table;

• by using Cramer´s V is 0,215,

• figures confirmed weak intensity of dependence.Department of International Business, Paneuropean University, Bratislava, 2012

CONCLUSION FROM TESTING HYPOTHESIS III.

We examine whether the size of observed funds is closely related to size of investment We examine whether the size of observed funds is closely related to size of investment during crisis, rate of growth of the countries, or both variables together. N=7 SWFsduring crisis, rate of growth of the countries, or both variables together. N=7 SWFs



TESTING HYPOTHESIS IV.

• by using method MLS 12,04 percent changes of fund value are attributed changes of growth rate,

• by using ANOVA and regression statistics we found that 18,96 percent of changes in value of fund may be caused by changing in growth rate and their investments during crisis,

• coeficient of investments $bn means 2,91 percent impact on value of funds,

• and GDP growth (annual %) has negative percentage of contributions for change value of fund.


CONCLUSION FROM TESTING HYPOTHESIS IV.

We examine what is the dependence of the value of observed funds on inflation rate We examine what is the dependence of the value of observed funds on inflation rate (quantitatively variables(quantitatively variables)) and year of established, price of crude oil (qualitatively and year of established, price of crude oil (qualitativelyvariablesvariables)). N=19 . N=19


TESTING HYPOTHESIS V.


By using regression statistics and ANOVA showed that 45,35 percent of changes on value of observed funds may be caused by 6 variables: • by inflation,• number of years since the establishment (from 1953 to 2011), • price of crude oil (current105,90$; future 130$, 150$), • and 54,65 percent of changes on size of funds may be caused by other variables.

• By example, seventh fund with current value 56,7($bn) suppose to have 104,31 ($bn) due to 45,35 percent impact of variables on funds, 54,65 percent impact may be from other variables.


CONCLUSION FROM TESTING HYPOTHESIS V.

Do you see any strategic difference between Do you see any strategic difference between the Sovereign Wealth Fund of Norway the Sovereign Wealth Fund of Norway

and and Gulf Oil Countries?Gulf Oil Countries?

QUESTION


1.GOVERNMENT PENSION FUND - NORWAY Did not recapitalise banks during crisis


SWFSWFForeignForeignBankBank DateDate StakeStake ValueValue

Abu Dhabi ADIAAbu Dhabi ADIA Apollo (U.S.)Apollo (U.S.) July-07July-07 10%10%

CitigroupCitigroup(U.S.)(U.S.)

November-November-0707 7,5bn$7,5bn$

Qatar Investment AuthorityQatar Investment Authority Barclays (UK)Barclays (UK) July-07July-07 6,42%6,42%

Kuwait Investment AuthorityKuwait Investment AuthorityCitigroupCitigroup(U.S.)(U.S.)

November-November-0707 3bn$3bn$

Merrill LynchMerrill Lynch January-08January-08 2%2% 3,3bn$3,3bn$

Saudi Arabia Mon. AgencySaudi Arabia Mon. Agency UBSUBS January-07January-07 1,60%1,60% 1,8bn$1,8bn$

GPF NorwayGPF Norway

HSBC HSBC Holdings PLC Holdings PLC (UK)(UK) $3,1bn$3,1bn

1.GOVERNMENT PENSION FUND - NORWAY Strategic investment weights


•60% equities,

•35–40% fixed-income securities,

•5% real estate,

•Note: All investments must be outside Norway,

•Future: The fund will mainly invest in unlisted real estate, well-developed property markets and traditional property types,

•Classified as Macro stabilization, Saving and Pension Reserve Funds.

1.GOVERNMENT PENSION FUND - NORWAYSix strategic focus areas


•Equal treatment of shareholders,

•Shareholder influence and board accountability,

•Well-functioning, legitimate and efficient markets,

•Children’s rights,

•Climate change risk management,

•Water management,

•NBIM is a signatory to the UN Principles for Responsible Investment,

•reports ownership activities on a quarterly basis.

2. KUWAIT INVESTMENT AUTHORITYStrategic investment


•Fixed Deposit,

•FX,

•Mutual Money Market Funds,

•Bonds and Sukuk,

•Credit Research.

•Areas: North America, Europe, Asia and Emerging Markets,

•Classified as Macro stabilization and Saving fund.

2. KUWAIT INVESTMENT AUTHORITY Prohibits informations I.


Law No. 47 of 1982 regarding the establishment of KIA has select clauses:

i. Clause 5 requires KIA to present a detailed report to the Council of Ministers on the Assets Under Management.

ii. Clause 8 prohibits generally the disclosure to the public of any information related to KIA's work.

iii. Clause 9 states the penalties for unauthorized disclosure of information to the public.

2. KUWAIT INVESTMENT AUTHORITY Prohibits informations II.


• makes annual closed door presentations on the full details of all funds under its management,

•including its Strategic Asset Allocation,

• benchmarks and rates of return to the council of ministers as well as to the national assembly.

3. DIFFERENCES OF INVESTMENTS BY GEOGRAPHIES


SWFSWF PercentagePercentage GeographiesGeographiesNorwayNorway 53,30%53,30% EuropeEurope

ADIAADIA 35-50%35-50% USAUSA

KIA /Kuwait/KIA /Kuwait/ 76-86%76-86% USA, EuropeUSA, Europe

QIA /Qatar/QIA /Qatar/ N/AN/A N/AN/A

LIA /Libya/LIA /Libya/ 70,70%70,70% EuropeEurope

Brunei /BIA/Brunei /BIA/ N/AN/A N/AN/A

Mubadala Mubadala 33%33% UAEUAE

BahrainBahrain N/AN/A N/AN/A

Source: Author´s, according to data from fund´s websites

4. DIFFERENCES OF LINABURG – MADUELL TRANSPARENCY INDEX


5

10

1

Source: Author´s, according to data from SWF Institute, 1Q 2012

Antonia [email protected]

May 23, 2012

Thank you for attention!

Sovereign Wealth Fundsand

their impact on international finance

Department of International Business, Paneuropean University, Bratislava, SLOVAKIA, 2012

Documents

SWF_Diploma_thesis_2012