How and Why Do Sovereign Wealth Funds Tilt Their Portfolios?

Abstract

We study how and why sovereign wealth funds tilt their overall portfolio tilt of sovereign wealth funds relative to an appropriate long-horizon benchmark. We re-create the investments in all asset classes (public equity, private equity, private equity fund holdings, real estate, fixed income and other alternative assets) for the largest sovereign wealth funds and benchmark them against endowments and pension funds. In our initial sample of ten sovereign wealth funds, covering an average of 178 portfolio holdings per fund, we find that sovereign wealth funds tilt their portfolios toward domestic investments and toward specific sectors, namely, financials, leisure goods and services and infrastructure. In terms of asset classes, they over-weight direct private equity and real estate and under-weight public equity. We then ask why. We explore the possible non-domestic reasons including implicit or explicit restrictions on sovereign investment (e.g., Dubai Ports), commercial or political motives (e.g., securing stability for the oil sector), and superior information about a sector (shipping, oil, etc.). In addition, we consider internal tilt motives including strategic development, internal stability motives, fund managers' familiarity bias or lack of expertise, and moral-driven preferences. Our preliminary evidence suggests that sovereign wealth funds are somewhat concerned with commercial stability of the oil sector and somewhat affected by biases and lack of expertise of the managers. The largest reason, however, for the portfolio tilt is to follow governmental priorities for strategic development.