As the size of their stake rises, they move from monitoring and coalition building to acting like owners, often with board representation. Some asset owners are large enough to engage on their own by formally allocating dedicated capital to a relationship-investing strategy.
For smaller asset owners, independent funds like ValueAct Capital and Cevian provide a way to pool their capital in order to influence the strategies of public companies. The partners in such a coalition can jointly interact with management without the fixed costs of developing an in-house team.
Engaging with companies on their long-term strategy can be highly effective even without acquiring a meaningful stake or adopting a distinct, formal investment strategy. It puts these companies on its Focus List—originally a published list but now an internal document—and tries to work with management and the board to institute changes in strategy or governance. Other studies have shown similar results, with companies doing even better in the first three years after going on the Focus List.
Despite the evidence that active ownership is most effective when done behind the scenes, there will inevitably be times when public pressure needs to be applied to companies or public votes have to be taken. In such cases, asset owners with sufficient capacity should go well beyond following guidance from short-term-oriented proxy advisory services.
Instead they should develop a network with like-minded peers, agree in advance on the people and principles that will guide their efforts, and thereby position themselves to respond to a potentially contentious issue with a company by quickly forming a microcoalition of willing large investors. Transparency makes such collaborative efforts easier. Elsewhere, big asset owners and managers should also publish their voting policies and, when a battle is joined, disclose their intentions prior to casting their votes.
Smaller asset owners or those less interested in developing in-house capabilities to monitor and engage with companies can outsource this role to specialists. Finally, to truly act as engaged and active owners, asset owners need to participate in the regulation and management of the financial markets as a whole. With some exceptions, they have largely avoided taking part publicly in the debates about capital requirements, financial market reform, and reporting standards.
Some of the biggest players in the game are effectively silent on its rules. As long-term investors, asset owners should be more vocal in explaining how markets can be run more effectively in the interests of savers. Making long-term investment decisions is difficult without metrics that calibrate, even in a rough way, the long-term performance and health of companies. The specific measures will vary by industry sector, but they exist for every company.
It is critical that companies acknowledge the value of these metrics and share them publicly. Natura, a Brazilian cosmetics company, is pursuing a growth strategy that requires it to scale up its decentralized door-to-door sales force without losing quality. To help investors understand its performance on this key indicator, the company publishes data on sales force turnover, training hours per employee, sales force satisfaction, and salesperson willingness to recommend the role to a friend.
Similarly, Puma, a sports lifestyle company, recognizes that its sector faces significant risks in its supply chain, and so it has published a rigorous analysis of its multiple tiers of suppliers to inform investors about its exposure to health and safety issues through subcontractors. Asset owners need to lead the way in encouraging the companies they own to shift time and energy away from issuing quarterly guidance.
In pursuing this end, they can work with industry coalitions that seek to foster wise investment, such as the Carbon Disclosure Project, the Sustainability Accounting Standards Board, the investor-driven International Integrated Reporting Council, and most broadly, the United Nations—supported Principles for Responsible Investment. But simply providing relevant, comparable data over time is not enough. After all, for several years, data sources including Bloomberg, MSCI, and others have been offering at least some long-term metrics—employee turnover and greenhouse gas intensity of earnings, for example—and uptake has been limited.
To translate data into action, portfolio managers must insist that their own analysts get a better grasp on long-term metrics and that their asset managers—both internal and external—integrate them into their investment philosophy and their valuation models. Proper corporate governance is the critical enabler. If asset owners and asset managers are to do a better job of investing for the long term, they need to run their organizations in a way that supports and reinforces this.
The first step is to be clear that their primary fiduciary duty is to use professional investing skill to deliver strong returns for beneficiaries over the long term—rather than to compete in horse races judged on short-term performance. The board must be independent and professional, with relevant governance expertise and a demonstrated commitment to a long-term investment philosophy. Board members need to have the competencies and time to be knowledgeable and engaged.
Unfortunately, many pension funds—including many U. However, successful models do exist. Professional oversight needs to be complemented by policies and mechanisms that reduce short-term pressures and promote long-term countercyclical performance. These could include automatic rebalancing systems to enforce the selling of equities during unsustainable booms, liquidity requirements to ensure there is cash available to take advantage of times of market distress, and an end to currency hedging to reduce the volatility of short-term performance.
Such policies need to be agreed to in advance of market instability, because even the best-governed institutions may feel the heat during such periods. Its strong governance, however, coupled with ample liquidity, allowed it to continue on its long-term path. A final imperative for the boards and leadership of asset owners is to recognize the major benefits of scale. Larger pools of capital create more opportunities to invest for the long term by opening up illiquid asset classes, making it cost-effective to invest directly, and making it easier to build in-house engagement and active ownership capabilities.
That suggests that savers, regulators, and board members of smaller asset owners should be open to these institutions pooling assets or even merging. Today a strong desire exists in many business circles to move beyond quarterly capitalism.
But short-term mind-sets still prevail throughout the investment value chain and dominate decisions in boardrooms. Large asset owners can be a powerful force for instituting balanced, long-term capitalism that ultimately benefits everyone. Until these organizations radically change their approach, the other key players—asset managers, corporate boards, and company executives—will likely remain trapped in value-destroying short-termism.
But by accepting the opportunity and responsibility to be leaders who act in the best interests of individual savers, large asset owners can be a powerful force for instituting the kind of balanced, long-term capitalism that ultimately benefits everyone.
You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Finance and investing. Focusing Capital on the Long Term. From the Magazine January—February Reprint: RB Since the financial crisis of , there has been widespread agreement on the need for public companies to build value for the long term.
They should act by taking four practical, proven steps: Define long-term objectives and risk appetite, and invest accordingly. Practice engagement and active ownership. Demand long-term metrics from companies to improve investment decision making. Structure institutional governance to support a long-term approach. Big investors have an obligation to end the plague of short-termism. The motives for establishing a sovereign wealth fund vary by country. For example, the United Arab Emirates generates a large portion of its revenue from exporting oil and needs a way to protect the surplus reserves from oil-based risk; thus, it places a portion of that money in a sovereign wealth fund.
The first funds originated in the s. Sovereign wealth funds came about as a solution for a country with a budgetary surplus. The first sovereign wealth fund was the Kuwait Investment Authority , established in to invest excess oil revenues. Over the last few decades, the size and number of sovereign wealth funds have increased dramatically.
Sovereign wealth funds can fall into two categories, commodity or non-commodity. The difference between the two categories is how the fund is financed. Commodity sovereign wealth funds are financed by exporting commodities. When the price of a commodity rises, nations that export that commodity will see greater surpluses.
Conversely, when an export-driven economy experiences a fall in the price of that commodity, a deficit is created that could hurt the economy. A sovereign wealth fund acts as a stabilizer to diversify the country's money by investing in other areas.
Non-commodity funds are typically financed by an excess of foreign currency reserves from current account surpluses. Sovereign wealth funds are traditionally passive , long-term investors. Few sovereign wealth funds reveal their full portfolios , but sovereign wealth funds invest in a wide range of asset classes including:.
However, a growing number of funds are turning to alternative investments , such as hedge funds or private equity , which are not accessible to most retail investors. The International Monetary Fund reports that sovereign wealth funds have a higher degree of risk than traditional investment portfolios, holding large stakes in the often-volatile emerging markets.
Sovereign wealth funds use a variety of investment strategies :. Funds also differ in the level of control they assume when investing in companies:. Sovereign wealth funds represent a large and growing portion of the global economy.
The size and potential impact that these funds could have on international trade have led to considerable opposition, and the criticism has mounted after controversial investments in the United States and Europe. This fear could also lead to investment protectionism , potentially damaging the global economy by restricting valuable investment dollars. In the United States and Europe, many financial and political leaders have stressed the importance of monitoring and possibly regulating sovereign wealth funds.
Many political leaders assert that sovereign wealth funds pose a threat to national security, and their lack of transparency has fueled this controversy. The United States addressed this concern by passing the Foreign Investment and National Security Act of , which established greater scrutiny when a foreign government or government-owned entity attempts to purchase a U. Western powers have been guarded about allowing sovereign wealth funds to invest and have asked for improved transparency.
However, as there is no substantive evidence that funds are operating under political or strategic motives, most countries have softened their position and even welcomed the investors. Kuwait Investment Authority. John Mikesell. Cengage Learning, Accessed May 22, Abu Dhabi Investment Authority. Singapore Government -- HistorySG. Norges Bank Investment Manager. Sovereign Wealth Fund Institute. International Monetary Fund.
Some examples of long-term goals include:. Such goals may include:. This is because, over such a period, you have the time to recover from factors like market downturns. For the same reason, it also allows you room to learn from experience and better manage your investments. Due to their high-risk profile, investments such as stocks also offer you potentially high returns over time, thus giving you a better chance at being protected from inflationary forces.
Short-term investments are well-suited for specific needs, such as funds for a vacation or a down payment for a car. Short-term investments allow better liquidity for use in the near future. Certain short-term bonds for instance, may offer you a guaranteed return while also allowing you to withdraw your money at any time. If you are in a financial situation that necessitates a regular income flow, short-term investments may offer you this.
Fixed income or unit trusts with dividend payouts, for example, may help in such circumstances, although the return may not be as high as in the case of, say, stocks. You may also want to consider diversifying your investment portfolio to include instruments for both long- and short-term investments. That way, you will be able to balance out your risks while tending to different needs that may arise periodically.
A diverse range of investment vehicles are available for all types of investors. Here are a few options to go with based on your timelines and risk appetite. No matter what your life goals are, ensure you set a timeline to achieve each of them, then, choose an investment strategy that meets your unique requirements, such as expected returns and risk appetite. Such an approach will prove invaluable in your quest to balance out your investments to meet short-term and long-term life goals.
To find out more about investing your wealth, reach out to us at Standard Chartered Wealth Connect. This article is for general information only and it does not constitute an offer, recommendation or solicitation of an offer to enter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This article has not been prepared for any particular person or class of persons and does not constitute and should not be construed as investment advice or an investment recommendation.
It has been prepared without regard to the specific investment objectives, financial situation or particular needs of any person or class of persons. You should seek advice from a licensed or an exempt financial adviser on the suitability of a product for you, taking into account these factors before making a commitment to purchase any product or invest in an investment.
In the event that you choose not to seek advice from a licensed or an exempt financial adviser, you should carefully consider whether the product or service described herein is suitable for you. You are fully responsible for your investment decision, including whether the investment is suitable for you. Standard Chartered Bank Singapore Limited will not accept any responsibility or liability of any kind, with respect to the accuracy or completeness of information in this article.
Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured. How would you like to apply? Tell us who you are. Neither a student nor an executive. How can we help you today? What kind of loan are you looking for? Monetary policy. Bank reserves requirements Discount window Gold reserves Interest rate Monetary authority central bank currency board Monetary base Monetary currency union Money supply.
Trade policy. Revenue Spending. Non-tax revenue Tax revenue Discretionary spending Mandatory spending. Balanced budget Economic growth Price stability. Fiscal adjustment Monetary reform. Further information: Santiago Principles. See also: List of countries by sovereign wealth funds and List of countries by foreign-exchange reserves. Central Banking Journal. May Archived from the original PDF on 29 May Retrieved 2 September SWF Institute.
The Wall Street Journal. Retrieved 8 August Nicolas J. The Economist. International Studies Quarterly. ISSN The New York Times. The Times. Retrieved 5 October The WorldFolio. Retrieved 27 September Hedge Fund Standards Board. Retrieved ". Retrieved 24 December Retrieved 10 December Retrieved 28 December Retrieved 29 December Retrieved 5 November Retrieved 29 January Future Fund.
Retrieved 23 June Retrieved 22 September Retrieved 31 December Retrieved 30 January Archived from the original on 11 February The University of Texas. Retrieved 7 August New Mexico State Investment Council. Retrieved 15 September Ministerio de Hacienda. Retrieved 17 September Department of Education". Department of Education. Retrieved 16 September CDP Equity in Italian. Endowment Fund Investment Board.
Retrieved 4 July Louisiana Treasury. Retrieved 14 September Fondo de Ahorro de Panama in Spanish. Retrieved 25 August Retrieved 24 August Retrieved 23 August Agaciro Development Fund. Retrieved 24 November Private equity and venture capital. History of private equity and venture capital Early history of private equity Private equity in the s Private equity in the s Private equity in the s. Financial sponsor Management buyout Divisional buyout Buy—sell agreement Leveraged recapitalization Dividend recapitalization.
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Categories : Sovereign wealth funds Foreign direct investment Investment funds Public finance International finance. Namespaces Article Talk. Views Read Edit View history. Help Learn to edit Community portal Recent changes Upload file. Download as PDF Printable version. Monetary policy Bank reserves requirements Discount window Gold reserves Interest rate Monetary authority central bank currency board Monetary base Monetary currency union Money supply.
Optimum Balanced budget Economic growth Price stability. Reform Fiscal adjustment Monetary reform. Government Pension Investment Fund. Government Pension Fund. China Investment Corporation. Kuwait Investment Authority. United Arab Emirates. Abu Dhabi Investment Authority.
Hong Kong. Exchange Fund Hong Kong. GIC Private Limited. Saudi Arabia. Public Investment Fund. Investment Corporation of Dubai. Qatar Investment Authority. Russian National Wealth Fund. Mubadala Investment Company. South Korea. Korea Investment Corporation. Future Fund . National Development Fund. Abu Dhabi Developmental Holding Company. Libyan Investment Authority. Kazakhstan National Fund.
United States of America. Alaska Permanent Fund . Brunei Investment Agency. United Arab Emirates Federal.
Sovereign Wealth Funds (SWFs) are state-owned investment fundswith combined asset holdings that are fast approaching fourtrillion dollars. PDF | Sovereign wealth funds represent a large and growing pool of savings. An increasing number of these funds are owned by natural resource-exporting. The paper argues that a well-governed sovereign wealth fund, with a sound mandate and professional management and staffing, can possibly improve the quality of.