Ashby H. B. Monk

Sovereign Wealth Funds: Legitimacy, Governance, and Global Power

The worldwide rise of sovereign wealth funds is emblematic of the ongoing transformation of nation-state economic prospects. Sovereign Wealth Funds maps the global footprints of these financial institutions, examining their governance and investment management, and issues of domestic and international legitimacy. Through a variety of case studies--from the China Investment Corporation to the funds of several Gulf states--the authors show that the forces propelling the adoption and development of sovereign wealth funds vary by country. The authors also show that many of these investment institutions have identifiable commonalities of form and function that match the core institutions of Western financial markets. The authors suggest that the international legitimacy of sovereign wealth funds is based on the degree to which their design and governance match Western expectations about investment management. Undercutting commonplace assumptions about the emerging world of the twenty-first century, the authors demonstrate that even small countries with large and globally oriented sovereign wealth funds are likely to play a significant role in international relations. Sovereign Wealth Funds considers how such financial organizations have altered not only the face of finance, but also the international geopolitical landscape.

Government of Singapore Investment Corporation (GIC): insurer of last resort and bulwark of nation-state legitimacy

Abstract The global financial crisis has shattered many illusions, one of which being that sovereign wealth funds (SWFs) are properly treated as arms-length investment institutions subject only to global standards of good governance. In fact, in a number of East Asian countries SWFs have acted as ‘insurers of last resort’ for their nation-states underwriting financial stability and social welfare. In this paper, we explain how and why this came to pass, arguing that this role serves to sustain the legitimacy of the nation-state as well as justify the separation of SWF assets from the public interest in current consumption and spending. Focusing upon the Government of Singapore Investment Corporation (GIC), we suggest that the prospect of recurrent financial crises was an important prompt for its establishment in 1981, reinforced by the experience of many East Asian countries in the 1997 Asian financial crisis. The formal constitution of the GIC, the mechanisms by which its reserves are returned to the government in crisis, and the role of different sections of the political elite in managing those assets are explained. Referencing the principles of best-practice fund governance and the Santiago Principles underwriting the legitimacy of SWFs, we also consider the governance of the GIC, especially as regards its investment processes. Implications are drawn for the experience of Western countries, particularly the UK and the USA, wherein the failure of their banking systems has put untold pressures on current and future living standards.

The Norwegian Government Pension Fund: Ethics Over Efficiency

The Norwegian Government Pension Fund Global has an explicit mission to integrate long-term investment return objectives with an ambitious ethical commitment. This approach has drawn praise among Western policymakers. However, we contend that the ethical investment policy of the Norwegian Government Pension Fund Global presents a paradox, as the manner in which the country applies its ethical criteria to investment management transgresses best practice as we define it. As a result, we believe that Norway has chosen to discount functional efficiency in favor of exerting a “fundamental social perspective”. This may have unfavorable consequences in the long run. Nonetheless, we recognize the current approach is the source of the public and political legitimacy the Fund enjoys today.

The geography of investment management contracts: the UK, Europe, and the global financial services industry

Contract is crucial for governing the relationships between asset owners and the many types of agents that underpin the production of financial services. We distinguish between discrete contracts for financial services and investment management contracts that are better described as relational in the sense that they are open ended and subject to renegotiation between the parties. Emphasis is placed upon the significance of risk and uncertainty in financial markets and the ways in which the parties to contracts adapt to these conditions. This provides the backdrop for understanding three different types of contractual arrangements apparent in the investment management industry, bringing to the fore the significance of the choice of jurisdiction when writing contracts for investment services. We explain how and why the UK is a favoured destination for European institutions just as offshore jurisdictions, such as the Cayman Islands, may be the favoured ‘home’ jurisdictions for certain types of UK and global investment managers. At the heart of the relationship between asset owners and asset managers is the power of these parties when choosing the type of contract and the jurisdiction which is the favoured location for formalising these relationships.

State and Local Pension Fund Governance and the Process of Contracting for Investment Services: The Scope of Diversity and the Problem of Embeddedness

Abstract US state and local public employee retirement systems (PERS) utilise various models of contract with distinctive features in their form and substantive content in relation to industry norms. These models differ between states, within states, and even between PERS within major metropolitan areas. Diversity goes against expectations to the effect that the sector relies upon commonly accepted investment management agreements (IMAs), given the similarities between state and local PERS as to the nature of pension benefits. One goal of this paper is to account for apparent commonalities and differences. Another goal of the paper is to explain the nature and significance of the pre-contract screening of potential suppliers to the sector, suggesting that requests for proposals tend to ‘sterilise’ contracts for investment management services. We provide a comparison of the categories and items evident in model IMAs with reference to selected states, in particular Illinois and the Chicago-area PERS. We also briefly note relevant provisions of pending legislation establishing the Oregon Investment Corporation, emphasising provisions which would enable the fund to make contracts like its private sector peers. The paper concludes that it is important to focus on the process of contracting in the US state and local PERS as well as the form of contract.

Partisan Politics and Bureaucratic Encroachment: The Principles and Policies of Pension Reserve Fund Design and Governance

In an era of population aging and increasing fiscal pressures on nation-states, pension reserve funds have been mooted as effective investment vehicles for realizing future liabilities and achieving some balance between generations. Nonetheless, concerns have been raised that partisan political interests combined with bureaucratic encroachment are likely to adversely affect fund performance. In this paper, we consider the issue of design and governance beginning with broader issues of institutional legitimacy and autonomy before looking more closely at the management of these institutions with respect to holding partisan politics and bureaucratic encroachment at bay. We suggest a set of six core principles of design and another set of six policies of governance and management that we believe are essential to the functional performance of such institutions. These principles and policies are derived from previous research on pension fund governance and detailed analysis of four pension reserve funds that offer lessons for best practice. These principles and policies are not intended to provide funds with an absolute claim for independence; rather, the design and governance of these institutions should facilitate an effective and symmetrical relationship between the institution and its sovereign sponsor. These arguments are developed with reference to changing global financial markets, and the fact that the financial assets of these institutions are increasingly seen in the context of nation-states’ total balance sheets of assets and liabilities.

Nation-State Legitimacy, Trade, and the China Investment Corporation

Relations between China and the USA began with the best of intentions: the USA would sponsor the normalization of China’s status in the international community through trade in exchange for China’s commitment to peaceful co-existence with the west. As an emerging economy, China has relied upon trade for export-led economic growth, mimicking the path taken by its immediate neighbours over the past 25 years and the road taken previously by Germany and Japan. For a variety of reasons, the original deal has been over-taken by the massive surge in Chinese exports to the USA, the tensions occasioned by the global financial crisis, and the sense in which the USA, as a debtor country, is now reliant upon China for its long-term future. The China Investment Corporation (CIC) is a product of the original deal and is emblematic of the new status of China in the global economy. As one of the world’s largest sovereign wealth funds, the CIC has eschewed conventional portfolio investment in developed financial markets for strategic investment in resources and jurisdictions deemed essential to China’s long-term growth. As such, attempts to rein-in its ambitions through the Santiago Principles and the like have been circumvented by a very different approach to investment. The CIC is re-making the rules of engagement in global financial markets, thereby redrawing the nature and scope of the long-term relationship between the two superpowers of the twenty-first century: China and the USA.

Sovereign Wealth Funds: Form and Function in the 21st Century

As representatives of nation-states in global financial markets, sovereign wealth funds (SWFs) share a common form and many functions. Arguably their form and functions owe as much to a shared (global) moment of institutional formation as they owe their form and functions to the hegemony of Anglo-American finance over the late 20th and early 21st centuries. We distinguish between the immediate future for SWFs in the aftermath of the global financial crisis, and two possible long-term scenarios; one of which sees SWFs becoming financial goliaths dominating global markets, while the other sees SWFs morphing into nation-state development institutions that intermediate between financial markets and the long-term commitments of the nation-state sponsors. If the former scenario dominates, global financial integration will accelerate with attendant costs and benefits. If the latter scenario dominates, SWFs are likely to differentiate and evolve, returning, perhaps, to their national traditions and their respective places in a world of contested power and influence. Here, we clarify the assumptions underpinning the conception and formation of sovereign wealth funds over the past twenty years or so in the face of the ‘new’ realities of global finance.

Platforms and Vehicles for Institutional Co-­Investing

A growing number of institutional investors, persistent in their desire to dis-intermediate and align interests with their portfolio managers, are turning away from external asset managers and are instead looking to one another for assistance. These direct investors are hoping to overcome the loss of agglomeration economies that asset managers enjoy within traditional financial centers by leveraging a new set of network economies through collaboration with peers. The over-arching question, however, is how these funds can actually co-invest to take advantage of these network effects in demonstrable ways. This can be quite challenging, as the differing return objectives and investment philosophies, not to mention the basic challenge of geography, all complicate matters. By highlighting a specific case study of co-investment and drawing on the qualitative data collected from over 20 on-site case studies of public pension funds and sovereign wealth funds around the world, this paper offers some insight as to how institutional investors can structure platforms and vehicles that will align interests and facilitate co-investment.

Pension Buyouts: What Can We Learn from the UK Experience?

This paper analyses the UK market for Defined Benefit (DB) pension buyouts and considers its implications for the USA. A DB pension fund buyout refers to a transaction in which a pension plan sponsor pays another company a fee to take over the assets and liabilities of the pension plan. Using various qualitative methodologies, this paper traces the evolution of the buyout from a transaction for insolvent plan sponsors to a transaction for solvent plan sponsors with funded pensions. While certain types of solvent buyouts have fallen out of favour, such as non-insured buyouts, this paper concludes that buyouts of the insured variety have a bright future. The increasingly burdensome nature of the DB pension plan will sustain this market over the long term. As such, this paper contributes to our understanding of the future prospects for employer-sponsored DB pensions, and how they will contribute to retirement income over time.