Reconciling transparency and long-term investing within sovereign funds

Abstract

One of the potential consequences of the international community's focus on transparency and commercial orientation, when it comes to sovereign wealth funds, has been to shorten the latter's investment time horizons. As a result, these theoretically long-term investors are pressured into behaving like many short-term investors in the marketplace today, pushed by structural conditions that demand short-term performance in order to secure legitimacy. In evaluating the tension between transparency and long-term investing, we offer a conceptual framework for thinking through different types of transparency pertaining to the investment process as a means of discussing and communicating acceptable and non-acceptable asymmetric information in relation to financial performance.

Keywords:

• sovereign wealth funds
• Santiago Principles
• financial markets
• short-termism
• long-term investing
• transparency

Acknowledgements

This paper was supported by the Collaboratory for Research on Global Projects at Stanford University. The authors thank Kyle Hatton, Dan Haberly and Paul Rose for comments on a previous draft. None of the above is responsible for any errors or omissions herein.

Notes

We accept that many nation-states are relatively new and the historical geopolitical record would suggest that time-horizons for many nation-states are not necessarily perpetual.

In our view, stabilization funds (a type of SWF) should not be included in among long-term investors due to their short-term mandate.

Equatorial Guinea is an apposite case in this regard. Like many other resource-rich yet resource-dependent countries, Equatorial Guinea undoubtedly suffers from the ‘resource curse’. Although the country is one of the richest in sub-Saharan Africa, with per capita GDP well over US$11,000, 77% of the country lives in poverty, and most institutions are weak and blighted by corruption (Goldman 2011). The country's wealth is managed by a close-knit group of family and ethnic group members under the leadership of President Teodoro Mbasago, who has ruled the country since 1979. In effect, the resource wealth has not been used to better the lives of the majority of the country's citizens. With the oil boom of the last decade, the government has developed a track record of savings. However, there are no mechanisms and safeguards in place to ensure that the funds will last. The country's political leadership does not make substantive disclosure about the fiscal budgeting process, and the existence of the country's sovereign fund, the Fund for Future Generations, provides limited reassurance either that funds will be preserved for the long-term, as nothing is known about the fund's management. In effect, the fund is a classic ‘rentier SWF’ that is ultimately in the service of a local elite (Dixon and Monk 2012). The elite may be able to maintain a long-term strategy, but it is likely that the fund and the returns it ultimately spins off will be used and appropriated for short-term (or personal, or politicized) causes (Hatton and Pistor 2012).

See http://www.nzsuperfund.co.nz/files/How%20We%20Invest.pdf [visited 29 February 2012].

One of the keys here is the double-arms length independence of the fund, separating it from the whims of politicians that might otherwise like to see short-term results.

As the case of Libya shows, just because the Gaddafi dynasty has been removed but the National Transitional Council is working to reform the governance of the Libyan Investment Authority for a post-Gaddafi Libya. See Sven Behrendt and Rachel Ziemba ‘Libyan Investment Authory. What's Next?’ http://www.economonitor.com/blog/2011/08/libyan-investment-authority-whats-next/ [visited 17 April 2012].