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The role of sovereign wealth funds as activist or passive fund managers

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Abstract

Sovereign wealth funds (SWF) have attracted a lot of media attention with recent investments in publicly listed companies. Repeatedly, concerns have been raised, such as the fear of industrial espionage or geopolitical threats. We analyze whether SWF managers acquire stakes in foreign publicly listed firms (1) to play an active role that would support concerns or (2) passively select investments to increase the portfolio diversification, for instance. We find that SWF target firms are more profitable, pay higher dividends and have a higher financial stability than their industry peers. This is in line with SWF managers passively seeking for further portfolio diversification in foreign public equity markets. We cannot find an improvement in operating or market performance after the engagement of SWF. Overall, our results indicate strong evidence that SWF managers primarily act as passive investors instead of pursuing activism strategies like private equity funds.

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Notes

  1. Please note that many SWF target firms operate in emerging markets. On the one hand, this limits the availability of controlling variables for the industry group portfolios owing to data availability (see Table 1 for varying data availability). On the other, industry group mean values might be affected owing to outliers even if controlling variables, such as the accounting data, are winsorized. Therefore, some accounting data like the ROA are rather scarce (or negative for industry rivals), which is arguably mainly driven by the large number of firms operating in emerging markets.

  2. Like Fotak et al (2013), we use the http://www.swfinstitute.org/research/fxr.php website to identify fund names and obtain suggestions for additions, deletions and transaction information.

  3. The results of the article remain quantitatively and qualitatively similar, if we use the raw data.

  4. In unreported tables, which are available from the authors upon request, we also employ a multivariate regression to control for Sovereign Wealth Fund Characteristics. Specifically, we use the Truman (2008) indices related to SWF structure, behavior, accountability and transparency, and governance. Generally, higher scores for every Truman (2008) index indicate a higher degree of transparency, independence from the government and return-related investment activities. Moreover, we control for the Economic Environment. We use the degree of uncertainty in foreign investments that should be lower in countries with higher economic freedom. The Index of Economic Freedom for each country of our sample is published by the Heritage Foundation and aggregates the scores of 10 economic categories, while higher scores indicate a higher degree of economic freedom. In addition to a country’s total score, we also consider an assessment of the contract enforceability (Property Rights) and the financial industry’s independence from government control (Financial Freedom). We also use other components of economic freedom, for example Business Freedom, Trade Freedom, Freedom from Corruption or Government Size, and find that our results remain stable.

  5. Please note that we also control for other local effects, that is for targets located in Asia. However, we find that our results are not affected by country effects.

  6. Lyon et al (1999) mention that an overlapping period of stock returns might cause a distortion of the return calculation and yields to misspecified test statistics as event months are not independent. Thus, we also calculate the calendar-time abnormal returns.

  7. Our results remain stable, if we use a three-digit industry INDG code to construct our rival portfolios. Tables are available from the authors upon request.

  8. In unreported tables, we analyze changes in target firm characteristics over time. We find no significant effects. However, if SWF successfully engage in activism improvements, the operating performance should follow in the post-investment period.

  9. A likely explanation for the mixed evidence on the activism hypothesis in prior studies is that they do not compare SWF target firms with industry peers.

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Authors and Affiliations

  1. Zeppelin University, Friedrichshafen, Am Seemooser Horn 20, Friedrichshafen, 88045, Germany

    Mark Mietzner

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  1. Mark Mietzner
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  2. Dirk Schiereck
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  3. Denis Schweizer
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Correspondence to Mark Mietzner.

Additional information

1studied Business Administration at the Goethe University Frankfurt subsequently worked as a research assistant at the University of Muenster and the European Business School (EBS) and received his doctoral degree in 2008. After 2 years as Assistant Professor at the Chair of Corporate Finance at the Darmstadt University of Technology, he then moved to Zeppelin University (ZU) where he worked as Assistant Professor of Alternative Investments and Corporate Governance and as Assistant Professor of Finance. He is currently Professor of Finance at ZU’s Family Business Research Institute. His research interests center around the fields of corporate finance, family business and corporate governance, with particular emphasis on ownership structures.

2obtained his Master’s Degree (German diploma) in Economics from Kiel University and his PhD in Business Administation and Banking from Mannheim University, where he also finalized his habilitation in 2000. After 2 years at the Institute for Mergers & Acquisitions of Witten/Herdecke University, he spent 6 years at the European Business School. In 2008 he recevied an appointment for the Chair of Corporate Finance at Darmstadt University of Technology. Schiereck is a member of the Scientific Advisory Board of DDV – Deutscher Derivate Verband (the German Derivatives Association).

3studied Business Administration at Goethe University Frankfurt. During his doctorate, he worked as a research assistant at the PFI Private Finance Institute at the European Business School (EBS) and completed his doctorate in April 2008. He was awarded the titles of Financial Risk Manager and Certified Financial Planner. In August 2008 Schweizer was appointed Assistant Professor of Alternative Investments at WHU – Otto Beisheim School of Management. He has published numerous articles in the field of alternative investments in renowned journals, such as JBF, JCF and EFM. In 2011/2012, he was a visiting scholar at New York University. In August 2014, he was appointed Associate Professor at Concordia University.

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Mietzner, M., Schiereck, D. & Schweizer, D. The role of sovereign wealth funds as activist or passive fund managers. J Asset Manag 16, 303–315 (2015). https://doi.org/10.1057/jam.2015.16

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  • DOI: https://doi.org/10.1057/jam.2015.16

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