New York – Traditionally investment research has been focused on the buy-side,
those folks that redeploy our collective retirement savings and sell us insurance.
Much of the research products in existence are designed for this group of
institutional investors. Over the past ten years, another major force has
matured in the form of hedge funds. Despite the fact that the hedge funds
have very little in common with the fiduciary buy-side, they have been lumped
into this group and research models have been adapted to fit the needs of hedge
Now, another force is developing in the financial world: Sovereign Wealth
Funds. In today’s Wall street Journal there is a review of this $2.0 trillion
industry. The genesis of these massive war chests, comes from one of three
sources: 1) Oil revenues, 2) fiscal surpluses and 3) foreign exchange reserves.
Oil: the wealth transfer from developed countries to the oil producing countries
has been clearly demarked over the past 30 years, and derives from countries
that demand more oil than they produce interacting with countries that produce
more than they consume.
Fiscal Surpluses and Foreign Exchange Reserves: We lump these two together
because they are really the same thing in terms of global financial balances. Any
economist will tell you that the balance of payments of a country adjusts to fill
the domestic saving and investment gap or surplus. The domestic equilibrium
has two components: the private sector and the public sector (government
deficits or surpluses.
For example, the US is in a fiscal deficit and its private sector savings rate is
near zero. Thus the country has a current account deficit, forcing it borrow
internationally to fund the gap.
During the first major international wealth transfer in the 1970s, the OPEC
nations were massive net beneficiaries of wealth. Here, there was very little
need for research, because most of the wealth was unsophisticatedly deposited
in US and European time deposits. The current situation is much more geared
towards a sophisticated international investment strategy approach. This raises
the question of what research firms are best positioned to take advantage of
Research Methodological Responses
As mentioned above, the question is whether there is a unique new research
methodology that can be developed to address this research need or whether
existing research abilities can fill this requirement.
Certainly, the geo-economic and political think tanks have a role in this research
needs of the SWFs. This is because the consideration of what investments will
offer the best return necessarily depends upon the outlook for the country and
the exchange rate. In the Integrity knowledgebase, there 83 research providers
who’s primary research offering is Investment Strategy analysis, 13 RPs that
offer Capital Flows Analysis, 13 firms that cover political risk, and 35 companies
that cover policy (to name a few).
Regulatory Research will be a key. This means that experts in the regulatory
arena will need to be developed. Firms such as Glass Lewis (recently purchased
by Ontario Teachers and ISS (now part of RiskMetrics) come to mind in the
proxy and corporate governance areas. There are 4 other firms in this space that
deal exclusively with regulatory analysis.
Governance issues relating to the share ownership and potential shareholder
activism which may not be entirely based on financial considerations. We have
13 firms that focus on corporate governance issues.
As the investment patterns of the SWFs are further analyzed it will become
more clear as to the investment style, turnover and research requirements will
be demanded to cover this investment class.