A comprehensive research study by IMD Professor of Finance Nuno Fernandes shows that Sovereign Wealth Funds (SWFs) have a stabilizing influence on companies and that their ownership is positively valued by the market.

Although SWFs have been widely discussed, much of the commentary on them is based on anecdotal evidence. Regulators question whether SWF investments benefit shareholders, while numerous critics claim that SWF investments are done with political motives in mind. Professor Fernandes’ study, the first to examine SWF equity holdings using a large-scale sample from 2002-2007, analyzes the impact of SWFs on company valuation. It covers more than 20,000 SWF holdings across 7,000 companies and encompasses funds’ stock holdings in 58 countries’ stock markets.

“It is often argued that SWFs invest in western companies as a means of gaining corporate intelligence, but the evidence suggests that SWFs do not display any preference for high-tech or research and development-intensive companies,” stated Professor Fernandes. “The results show that after an SWF invests in a firm, operational performance improves overall.”

The figure below presents evidence of the impact of SWF on different measures of firms’ operating performance. It uses return on equity (ROE), return on assets (ROA) and operating profit margins (defined as EBITDA/sales and EBITDA/assets) as measures of operating profitability.

“The controversy surrounding SWFs is more political than financial,” concluded Professor Fernandes. “SWF ownership is positively valued by the market, with a premium of about 15 percent of company value. This suggests that, contrary to claims that SWFs expropriate investors and pursue political agendas, they, in fact, contribute to long-term shareholder value. The evidence from this study suggests that the majority of SWF investments do not involve partial or complete control of firms. Even for investments that are large (and may involve control), there is no evidence that they harm companies or extract inside information or technology. The overall evidence is that firms perform better and are valued higher when SWFs invest in them.”

In the middle of the current market turmoil, sovereign wealth funds (SWFs) have emerged as the funding source of the next few years. SWFs manage more than $3,000 billion, which is almost twice as large as all private equity and hedge funds in the world combined. Some estimates suggest that SWFs will manage more than $10,000 billion by 2015.

His study results are detailed in an IMD working paper “Sovereign Wealth Funds: Investment Choices and Implications Around the World”.

Professor Fernandes is also a Lamfalussy research fellow of the European Central Bank.