Testing the Strategic Asset Allocation of Stabilization Sovereign Wealth Funds

Abstract

None of the models that have been developed to determine the optimal strategic asset allocation (SAA) of stabilization sovereign wealth funds (SWFs) has received direct empirical validation, primarily because there is a lack of transparency regarding some of the key parameters that characterize the problem. In this paper, building on a mean-variance framework, we derive three sets of parsimonious statistical tests to compare the actual SAA of SWFs to a theoretical optimum. We apply these tests to the portfolio of the world's largest stabilization SWF (the Norwegian Government Pension Fund-Global or GPF) for the period between 2002 and 2005. The empirical analysis confirms that the static and dynamic deviations of the GPF's SAA from the market equity portfolio are consistent with the theoretical predictions.Ã We thank the editor of the journal-Benn Steil-and two anonymous reviewers for their excellent and constructive comments. We thank Robert Faff for his suggestions and Stefano Predebon for research assistance. We gratefully acknowledge financial support from Fondazione Ansaldo.

Rise of the Fiduciary State: A Survey of Sovereign Wealth Fund Research

“…Bertoni and Lugo () use a mean‐variance framework to develop a model of the optimal strategic asset allocation for stabilization SWFs (those funded by oil revenues). They derive three sets of parsimonious tests to compare the actual allocation of Norway's GPFG to its theoretical optimum.…”

“…Four of these papers (Martellini and Milhaup, 2010;Sa and Viani, 2011;Schena and Kalter, 2012;Bodie and Brière, 2014) describe optimal asset allocation models for SWFs based on general financial and economic principles relating to global investor preferences, contingent claims models of sovereign government funding sources and spending obligations, and/or the sponsoring nation's sensitivity to commodity price variability. The next three articles (Scherer, 2009;Balding and Yao, 2011;Bertoni and Lugo, 2013) focus on oil-financed SWFs and examine how this funding model should influence the asset allocation decisions of such funds. Two more studies describe the optimal investment policy followed by Norway's Government Pension Fund Global (GPFG) and assess whether the fund's actual asset allocations are consistent with the optimal design (Ang et al, 2009;Chambers et al, 2012).…”

“…The GPFG has long pursued an asset allocation policy akin to the classic foundation model of investing in publicly traded stocks and bonds, as opposed to the more recently developed endowment model of allocating fund resources much more towards illiquid/unlisted stocks and bonds, real estate, private equity, and alternative and absolute return investments. In addition to the aforementioned Bertoni and Lugo (2013), who develop a generalized model but test it on GPFG's portfolio, two studies focus explicitly on the optimal and actual asset allocations of the GPFG. The Ang et al (2009) article is actually a report commissioned by the Norwegian government evaluating the role of active management by the Norges Bank Investment Management (NBIM) group of the Norwegian GPFG over the period from inception in 1998 through early 2009.…”

The Political Implications of Norway’s Sovereign Wealth Fund investments in Eastern and Central Europe

“…The hybrid nature of these entities implies not only methodological difficulties in defining which state run fund is and which is not a SWF, but also makes it difficult or even impossible to draw conclusions that can be generalized to the entire group. Moreover, the lack of transparency about strategic asset allocation and the absence of a robust model describing it hinders in many cases the analysis on whether SWFs pursue political goals, rather than purely financial objectives (Bertoni, Lugo 2012). Against the majority of funds, GPFG is a unique case.…”

The investment attractiveness of companies listed on the Warsaw Stock Exchange to Sovereign Wealth Funds

“…The first analyses the objectives of SWF activity, the key features of these investors, their asset allocations and organisational models as well as the size of their investments (Mele 2014;Bertoni -Lugo 2011;Avendano -Santisi 2009). The second includes analyses focusing on the macroeconomic implications of SWFs activity for a single economy as well as for the global financial market (Urban 2011;Sun -Hesse 2009;Beck -Fidora 2008).…”