Sovereign Wealth Funds: What (Really) Drives Them? An Econometric Analysis

Abstract

Sovereign Wealth Funds have been subject to ever-increasing concerns and little scientific analysis. As a consequence of their recent gain in prominence, significant worries have been expressed as Sovereign Wealth Funds, being large state-owned institutional investors, may eventually take investment decisions driven more by political and/or other objectives than by pure economic considerations. We investigate their investment decision drivers and rationale to invest and we provide a data-supported analysis of what really drives their investments. The study is based on a widely-recognized and proven econometric model, adapted where necessary in order to take into account Sovereign Wealth Funds' peculiarities and some accepted critics. The sample analyzed covers more than 300 companies invested in the last 30 years and domiciled in 29 countries. The model allows us to extract the drivers which lie behind targets' public equity returns. The drivers have been defined in terms of either economic justifiable or other-than-economic news. Based on the ex-post results, we infer what is likely to drive sovereign investments. Results are twofold: when just economic considerations are allowed to lead Sovereign Wealth Funds' investments, data strongly indicate sovereign investors mostly seek for companies with very high future cash-flow generation capabilities and/or characterized by great fundamentals rather than undervalued and/or market depressed companies. Removing the hypothesis of funds purely rational, economic-optimizers, we found other than economic motivations played a role in leading targets' equity returns. Nonetheless, data only allude to non-economic considerations that matter greatly in sovereign funds' decision processes with respect to economic ones.