Public Funds Investment Policies: 2016 Survey

The Public Funds Investment Policies Survey is an annual publication, now in its fourth year, which surveys the current investment policy disclosures of the 25 largest (by AUM) sovereign wealth funds (SWFs) in the world, as listed by the Sovereign Wealth Fund Institute, and the 25 largest (by AUM) sovereign pension funds (SPFs). The policies reviewed in this survey were obtained directly from the funds when possible, using data available as of summer 2016. Because a minority of funds (primarily SWFs) do not disclose investment policies, caution should be used in interpreting these results. Many funds may have extensive internal policies but choose not to disclose these policies, and the lack of disclosure should not be taken as evidence that such policies do not exist. When possible, reference was made to other sources of data to corroborate or augment disclosed data.

 

Thanks to Yuxin Li and Paxton Endres for valuable research assistance.  The survey can be downloaded here.

 

 

Aubry & Crawford: State and Local Pension Reform since the Financial Crisis

From the Introduction:

In the wake of the financial crisis, many state and local pension plans have reduced benefits and increased required employee contributions to curb rising employer costs. While past research suggests that most state plans have made some changes, little information is available about reforms at the local level.

This brief documents and compares the reform patterns for over 200 major state and local plans between 2009 and 2014 and investigates how and why the changes were made. The discussion proceeds as follows. The first section describes the data and methodology. The second section provides background on legal protections that might impede changes in benefits for current employees. The third section catalogues and compares the benefit  reforms made since the financial crisis – separately assessing reforms applied to current employees and to new hires. The fourth section introduces a regression analysis to better understand what factors have motivated both reforms overall and reforms aimed at current employees. The fifth section presents the regression results. The final section concludes that, unsurprisingly, the biggest factor related  to reforms overall was the cost of the plan relative to the total revenue of its sponsoring government, while the main factor related to reforms for current employees was the strength of state legal protections for benefits.

 

Available for download here.

Tejera: The U.S. Law Regime of Sovereign Immunity and the Sovereign Wealth Funds

Abstract:

This article is concerned with the applicability of sovereign immunity to the so-called sovereign wealth funds (“SWFs”) within the U.S. legal system. While sovereign immunity has existed for at least two centuries, SWFs and the types of investment activities they conduct on behalf of their parent foreign states are a rather recent phenomenon. As a result, the issue of the applicability of the rules on sovereign immunity to the SWFs poses
novel legal challenges and difficulties. In a nutshell, this article is intended to answer the following questions: Are SWFs entitled to invoke sovereign immunity before U.S. courts? If so, what is the U.S. law regime of sovereign immunity applicable to the case of the SWFs?

 

Available for download here.

Munnell and Chen: New Developments in Social Investing by Public Pensions

From the Introduction:

Social investing is the pursuit of environmental, social, and governance (ESG) goals through investment decisions. Public pension funds have been active in this arena since the 1970s, when many divested from apartheid South Africa. They have also aimed to achieve domestic goals, such as promoting union workers, economic development, and homeownership. In the mid-2000s, the focus shifted to preventing terrorism and gun violence. This effort included “terror-free” investing in response to the Darfur genocide and to weapons proliferation in Iran. And, after mass shootings in Aurora, CO, and  Newtown, CT, some public funds shed their holdings in gun manufacturers. Most recently, states have renewed the call to divest from Iran and have increasingly targeted fossil fuels to combat climate change.

This brief provides an update of social investing developments and assesses whether, in this changing environment, public funds should engage in this practice. This assessment addresses two questions: 1) can ESG-screened portfolios meet the same return/risk objectives as non-screened portfolios; and 2) are public plans the right vehicle for advancing ESG goals? The discussion proceeds as follows. The first section explores trends in social investing and the U.S. Department of Labor’s guidance on this activity. The second section examines recent state divestment efforts. The third section analyzes the economics of social investing. The fourth section outlines the economic, political, and legal complications. The final section concludes that although social investing may be worthwhile for private investors, lower returns and fiduciary concerns make public pension funds unsuited for advancing ESG goals.

Available for download here.

Garcia Sanchez: The Hydrocarbon Industry’s Challenge to International Investment Law – A Critical Approach

Abstract:

The research presented here challenges the contemporary view that the international investment regime has a “chilling effect” on host government policies. That critique errs in assuming that the effects of the modern bilateral investment treaties on decision making within host governments have been uniform across states and economic sectors. The main argument presented here is that in developing countries that depend on the oil and gas sectors, the international investment regime rarely deters host government rent-seeking behavior that can harm foreign investors.

In petro-dependent developing nations that have weak institutional capacity the survival of the government becomes tied to its ability to capture the industry’s extraordinary profits. The governments in Bolivia, Venezuela, Nigeria, Kazakhstan, and Ecuador, to name a few, no longer rely on ordinary sources of tax revenue; rather, they tend to get trapped in a “rent dependency curse” in which the governments derive an overwhelming portion of their budgets from natural resource revenues. Their institutional stability depends on their ability to capture the rents, which consequently affects foreign investors’ rights.

The decisions of investment tribunals in investor-state disputes have not changed the  petro-dependent governments’ propensity to choose rent-seeking policies. This phenomenon can be traced to the attitude of investment tribunals toward remedies. In an effort to maintain their reputation, tribunals have been timid in ordering performance remedies—such as ordering a state in violation of its treaty obligation to halt its offending behavior—and instead have relied heavily on compensatory damages. This results in a paradox: in petro-dependent states, host governments violate treaty provisions and capture oil and gas rents for their benefit, and simply use these rent proceeds to pay pecuniary remedies when ordered by international tribunals.

Available for download here.

Freund and Sidhu: Global Concentration and the Rise of China

Abstract:

Using firm level data, we examine how global concentration has changed over the last decade in light of the rise of China. We find that global concentration has declined in most industries, is falling on average across industries, and there is significant churning of firms at the top of the distribution. The enhanced industrial competition is partly attributable to the rising market shares of emerging market firms at the expense of incumbent industry leaders. However, global concentration has risen significantly in a number of industries where Chinese state-owned enterprises dominate, such as mining, metals, real estate and construction. Controlling for mergers and acquisitions and other factors, we find that the presence of a Chinese SOE at the top of the firm-size distribution is associated with a 4 percentage point increase in concentration. The results imply that while the overall impact of China’s rise has been a small but significant increase in global competition, state-ownership has significantly distorted global competition in a number of industries.

 

Available for download here.

Bentivogli and Mirenda: Foreign ownership and performance – evidence from a panel of Italian firms

Abstract:

The paper studies the impact of foreign ownership on a firm’s economic performance. We use a unique panel dataset to test the foreign ownership premium by comparing our sample of firms based in Italy and owned by a foreign subject with a sample of purely domestic firms that, in order to have a proper counterfactual, were selected using propensity score matching. Our difference-in-differences results show the existence of a premium for the size, profitability and financial soundness of the foreign-owned companies. The premium increases with time, is concentrated in the service sector, and disappears if the foreign investor is based in a fiscal haven.

 

Available for download here.

Al-Ojayan: Treating the Oil Addiction in Kuwait – Proposals for Economic Reform

Abstract:

In 2015, for the first time in 16 years, Kuwait reported a fiscal deficit of 2.71 billion Kuwaiti Dinars ($9.4 billion). The deficit was exacerbated by weakness in crude prices and mounting supply–demand imbalances in the global oil market. It is critical that Kuwait reacts with a fiscal contingency plan to avoid the uncertainties and volatility of depending primarily on oil to fund government activities. This paper aims to highlight the current economic condition and fiscal needs of Kuwait, as well as to propose a set of potential mitigating strategies for the government to consider.

Available for download here.

Boubakri, Cosset & Grira: Sovereign Wealth Funds Investment Effects on Target Firms’ Competitors

Abstract:

We investigate the impact of sovereign wealth funds acquisitions (SWFs) on the performance of target firms’ competitors. We find a positive and significant impact of SWFs acquisitions on target firms’ competitors. This means that market participants anticipate value creation in the targets competitors, due to likely expected restructuring activities. Further analysis shows that relatively large rivals, low leveraged rivals, rivals with highly correlated returns with those of their corresponding targets, rivals in less competitive industries show higher abnormal returns upon the acquisition announcement. Our results question the rationality of protectionism as legal barriers to sovereign wealth funds cross-border investments.

 

Available for download here.