1. 15 th Dubrovnik Economic Conference Hotel Grand Villa Argentina Dubrovnik, Croatia June 24-26, 2009

2. William Megginson University of Oklahoma Université Paris-Dauphine SOVEREIGN WEALTH FUND INVESTMENT PATTERNS AND PERFORMANCE Bernardo Bortolotti Università di Torino Fondazione Eni Enrico Mattei Veljko Fotak University of Oklahoma Fondazione Eni Enrico Mattei William Miracky Monitor Group

3. Term was coined only recently (Razanov, 2005). Can Be Defined Broadly, As In Truman (2008): “A separate pool of government-owned or -controlled financial assets that includes international assets.” We Use Monitor Group Definition: Defines SWF as 1.An investment fund, not an operating company, 2.Wholly owned by a sovereign government, but separated from central bank or finance ministry, 3.That makes international and domestic investments in a variety of risky assets, 4.Is charged with seeking a commercial return, and 5.Which is wealth fund rather than a pension fund. Sovereign Wealth Funds Defined

4. Major Sovereign Wealth Funds Listed by Monitor Group (2009) Country Fund Name (Principal investment subsidiaries) Assets US$Bn Launch Year Source of Funds UAE-Abu Dhabi Abu Dhabi Investment Authority $6271976Oil Norway Government Pension Fund – Global 3261990Oil Singapore Govt of Singapore Investment Corp 247.51981Non-Commodity Kuwait Kuwait Investment Authority 202.81953Oil China China Investment Corporation 1902007Oil Russia Reserve Fund 137.12004Oil Singapore Temasek Holdings 851974Non-Commodity Russia National Welfare Fund 83.62008Oil UAE-Dubai Investment Corp of Dubai (Istithmar) 822006Oil Libya Libyan Investment Authority 652006Oil Qatar Qatar Investment Authority (Qatar Hlg) 622003Oil Australia Australian Future Fund 42.22006Non-Commodity Kazakhstan Kazakhstan National Fund 382000Oil Brunei Brunei Investment Agency 301983Oil South Korea Korea Investment Corporation 272005Non-Commodity Malaysia Khazanah Nasional 23.11993Non-Commodity Total Oil & Gas Related$1,912 Total Other451 TOTAL$2,363

5. The Economist January 19-25, 2008

6. Reasons for Concern About SWFs, Responses By Governments & Funds Large (Estimated US$ 3.3 trillion, March 2008). Growing Fast (Estimated US$ 12 trillion By 2015). Biggest Funds Based In Non-Democratic Nations Most Cited Concerns: –Could be used for political purposes –Might induce volatility in financial markets –Could have a detrimental impact on governance Regulators, SWFs responded To Concerns –Santiago Principles signed October 2008 Market Meltdown Hit SWFs Very Hard

7. Largest Listed-Firm Investments And Returns (Inception - 3/27/09) Acquiror Name Target Name Investment Date Value ($mil) Value 3/27/09 Gain /loss ($mil) GIC-SingaporeUBS2/8/200814400.004339.16-10060.84 GIC-SingaporeUBS AG12/10/20079760.422121.06-7639.36 ADIACitigroup Inc.11/27/20077500.00684.87-6815.13 GIC-SingaporeCitigroup Inc1/15/20086880.00707.07-6172.93 GIC-SingaporeCitigroup Inc1/15/20086880.00707.07-6172.93 ADIAPrimeWest Energy9/7/20075000.005371.40371.40 CIC (China)Morgan Stanley12/19/20075000.002545.13-2454.87 TemasekMerrill Lynch12/27/20074400.00515.00-3885.00 KIA (Kuwait)Dow Chemical7/10/20084019.081171.06-2848.02 TemasekStandard Chartered3/27/20064000.002345.39-1654.61 TemasekMerrill Lynch7/27/20083400.001,767.28-1632.72 DIFC (Dubai)OMX AB2/29/20083396.803644.26247.46 QIACredit Suisse1/28/20083000.001680.90-1319.10 IstithmarTime Warner11/27/20062000.002300.0015.00 CIC (China)Fortescue Metals2/4/20082000.00552.96-1447.04 KIC (Korea)Merrill Lynch1/15/20082000.00238.02-1761.98 KIA (Kuwait)Merrill Lynch1/15/20082000.00238.02-1761.98 TemasekShin Corp1/23/20061900.00991.98-908.02 Total, 189 SWF listed investments$122,650.29$58,242.71-$55,820.05

8. Little Published Research On SWF Effects, Intentions, Behavior Most Available Work Non-Academic, Descriptive: –Monitor Group, Merrill Lynch, Deutsche Bank, SWF Institute, Peterson Institute, McKinsey Group Little Yet In Major Finance Or Economics Journals JACF: Butt, Shivdasani, Stendevad, Wyman (2008) –Descriptive paper, discusses implications for other investors, government, firms seeking financing. Several Competing Working Papers –Chhaochhria & Laeven (IMF, 2008); Dewenter, Han, Malesta (2009); Fernandes (2009); Kotter & Lel (FRB, 2008); Knill, Lee, Mauck (2009)

9. Our Empirical Research We Collect And Describe SWF Investment Data –investment size, financing methods, etc. How Do SWFs Pick Investment Targets? –Regional choices, Industries, Asset mix (RE,PE) Market Reaction To Investment Announcement? –Test prior performance and initial return using raw returns, market-adjusted, and matched-firm returns Long-Run Returns On SWF Investments? –Stress matched-firm adjusted return, but use others Regression Analysis Of Short & Long-Run Returns –Do SWFs create or decrease target firm value?

10. The FEEM-Monitor SWF Database Compiled From Three Sources Most Important, Monitor Group Dataset of Publicly Announced Deals –801 observations, worth $260.6 billion Bureau Van Dyck Zephyr Database of Global Mergers & Acquisitions –230 equity acquisitions, worth $71.8 bn Thomson Reuters SDC Platinum Global New Issues Database –239 equity issues, worth $84.1 billion Net Out 71 Overlapping Observations and Verify Key Data Yields Final Sample

11. Overall And Average Investment Size And Stake Purchased SummarySize ($US mn)% Acquired # of obs Value, $US mn Mean size Median size Mean stake Median stake All Investments1,216$357,133$441 $5542.3% 26.2% Listed equity379$141,218$383 $5019.4% 9.0% Unlisted equity719$170,659$349$3652.5%49.0% Unlisted operating co691$154,202$396$3353.3%49.0% Private equity funds10$9,526$1,905$1,20059.2%46.0% Initial public offerings7$2,773$396$1703.9%2.7% Joint ventures, other8$145$120 45.5% Real estate investments118$45,256$546$24573.1%100%

12. Industrial Distribution Of SWF Investments Industry Total number of observations Total value, $US millions # of obs % of Total value % of total Financials37630.9%$194,83454.6% Real estate14511.9%$54,57215.3% Information technology917.5%$27,4677.7% Industrials1119.1%$18,9075.3% Infrastructure161.3%$14,3694.0% Services604.9%$10,2732.9% Manufacturing756.2%$9,9652.8% Telecommunications524.3%$8,2472.3% Consumer products, services796.5%$6,4141.8% Transportation504.1%$6,0321.7%

13. Annual Value, Industrial Distribution of SWF Investments, 2000-2008 ($Mn)

14. SWF Home Country And Investment Patterns Home country Fund Name All investments Domestic investments # obs Value, $US mn# obs Value, $US mn SingaporeGovernment Investment Corp (GIC)188$81,3833$408 Singapore Temasek Holdings, Temasek Capital510$65,454159$9,213 ChinaChina Investment Company, Ltd12$37,3502$20,100 UAE Mubadala Development Comp62$30,27920$9,171 UAE Istithmar80$26,96215$3,972 Qatar Qatar Investment Authority (QIA)29$20,92600 Kuwait Kuwait Investment Authority18$19,8781---- UAE Abu Dhabi Investment Authority42$19,0727$51 UAE Dubai International Capital LLC20$11,0624$22 MalaysiaKhazanah Nasional Bhd108$10,01990$8,398 Total1,216$357,133326$58,351

15. Percent Of Investments In Domestic Versus Foreign Deals, 2000-2008

16. Target Countries For SWF Investments Target country Number of InvestmentsValue of Investments # of obs % of total Total value $US mn % of total United States13210.9%$79,38522.2% China796.5%$31,0008.7% United Kingdom836.8%$15,3564.3% UAE554.5%$14,8774.2% Singapore17714.6%$13,2303.7% Australia413.4%$12,1103.4% Malaysia1179.6%$10,5503.0% Hong Kong433.5%$7,9152.2% Other48640.0%$137,70339.3%

17. Target Firm Stock Returns Prior To SWF Investment Announcements Panel A: Raw Returns, Global Index IntervalN Mean Compounded Return Patell ZPositiveNegative Generalized Sign Z (-240,-1)22715.06%4.99***151767.062*** (-120,-1)2264.61%1.351 1251003.646*** (-60,-1)2252.64%0.274 126983.847** (-20,-1)2250.41%-0.481 1161092.501** Panel B: Market Adjusted Abnormal Returns, Global Index IntervalN Mean Compounded Abnormal Return Patell ZPositiveNegative Generalized Sign Z (-240,-1)2278.07%0.705 129982.501** (-120,-1)2261.83%-1.249 1161100.841 (-60,-1)2251.77%-0.439 1161090.907 (-20,-1)2250.43%-0.131 1161090.907 Panel C: Matched-Firm Abnormal Returns IntervalN Mean Compounded Abnormal Return Patell ZPositiveNegative Generalized Sign Z (-240,-1)212-8.01%-2.527**69143-4.395** (-120,-1)212-3.28%-1.978**90122-1.507 (-60,-1)212-1.43%-0.707 99113-0.269 (-20,-1)212-0.74%-0.075 1041080.419

18. Target Firm Stock Returns Around SWF Investment Announcements Panel A: Raw Returns, Global Index IntervalN Mean Cumulative Abnormal Return Patell ZPositiveNegative Generalized Sign Z (-1,+1)2350.95%3.27***131933.641*** (0,0)2340.21%1.655*113951.355 (0,+1)2340.70%3.473***137854.496*** Panel B: Market Adjusted Abnormal Returns, Global Index IntervalN Mean Cumulative Abnormal Return Patell ZPositiveNegative Generalized Sign Z (-1,+1)2350.93%3.309***1321032.451* (0,0)2340.20%1.915*1191150.818 (0,+1)2340.65%3.432***135992.911*** Panel C: Matched-Firm Abnormal Returns IntervalN Mean Cumulative Abnormal Return Patell ZPositiveNegative Generalized Sign Z (-1,+1)2290.87%1.853*129982.853*** (0,0)2290.08%0.618 1141071.132 (0,+1)2290.35%0.857 1221041.926*

19. Target Firm Stock Returns After SWF Investment Announcements Panel A: Raw Returns, Global Index IntervalN Mean Cumulative Abnormal Return Patell ZPositiveNegative Generalized Sign Z (+1,+120)219-0.95%-0.802 1041150.961 (+1,+240)1825.33%1.856*95852.420** (+1,+480)13142.42%6.892***77533.701*** Panel B: Market Adjusted Abnormal Returns, Global Index IntervalN Mean Cumulative Abnormal Return Patell ZPositiveNegative Generalized Sign Z (+1,+120)219-2.50%-2.397*94126-1.643 (+1,+240)1820.53%-0.651 82100-0.95 (+1,+480)13124.81%1.661*6269-0.274 Panel C: Matched-Firm Abnormal Returns IntervalN Mean Cumulative Abnormal Return Patell ZPositiveNegative Generalized Sign Z (+1,+120)217-5.98%-2.348**84133-2.417*** (+1,+240)217-10.23%-2.347**71146-4.186*** (+1,+480)208-15.49%-2.006**59149-5.354***

20. Regression Analysis of Announcement Period Matched-Firm Abnormal Returns Variable Cumulative Abnormal Returns (-1,+1) Intercept 0.0558-0.01210.01920.0931 Financial Target 0.0305 * 0.0385 ** 0.0295 * 0.0301 * Real Estate Target -0.0177-0.0215-0.0272-0.0293 LM Transparency Index 0.0022 Truman -Total -0.0005 Pre-Existing Stake -0.0517 *** -0.0460 *** -0.04714 *** -0.0503 *** Percent Acquired 0.00030.00070.00090.0007 Percent Acquired Squared 0.0000 Open Market Investment 0.02820.01340.01400.0175 Domestic Investment 0.00800.01020.0072-0.0055 1-Month Pre-Event BHAR 0.1375 *** 0.1433 *** 0.1316 *** 0.1391 *** Fixed Effects YesNo N 155142148 R-Sq (%) 22.5%17.5%16.5%10.2% Announcement period AR positively related to financial target and pre-event abnormal return, negatively related to pre-existing stake size. Regression explains 10-23% of C-S variation

21. Regression Analysis of Long-Run Matched-Firm Abnormal Returns Variable 6-Month BHARs1-Year BHARs2-Year BHARs Intercept -0.0917-0.14580.0360 Financial Target -0.1114 *-0.1126-0.2171 * Real Estate Target 0.13980.29340.4090 Truman - Structure 0.00100.0018-0.0044 Truman - Governance 0.0077 * 0.0112 * 0.0187 ** Truman –Accountabil & Transpar -0.0062 *-0.0089 *-0.0106 Pre-Existing Stake 0.0157-0.0236-0.1037 Percent Acquired -0.0013-0.0115 **-0.0185 ** Percent Acquired Squared <0.0001<0.0001 *0.0001 * 75% Acquisition 0.26980.1451 1.0799 ** Open Market Investment 0.05130.17730.2392 Domestic Investment 0.02850.11310.0238 1-Month Pre-Event BHAR 0.4100 **0.3211-0.0235 N 155144138 R-Sq (%) 22.5%12.6%16.9%

22. Summary Of Findings And Conclusions Describe Patterns And Performance Of 1,216 Investments Made By 35 SWFs, Jan 86 To Sept 08. –Worth over $35 billion, mostly since 2005 –Most investments in listed and unlisted equity –Small and declining fraction targeted domestically Almost One-Third (30.9%) Of The Number, Over Half the value (54.6%) Of SWF Investments In Finance. –10 deals, worth $58 bn, in bank stocks 11/07 to 2/08 Find A Significantly Positive Mean Abnormal Return Of About 0.9% Around The Announcement Date. –Positive return robust to different measures

23. Summary Of Findings And Conclusions But One-Year Matched-Firm AR Of -15.49%, So SWF Investments Followed By Declining Performance. –Becomes more negative the longer the investment horizon (-10.2%, 1-year; -15.5%, 2-year) Regressions Show Weak Evidence Of Monitoring Role Of SWFs, Evidence Of Agency Costs. –Higher IR, lower LRR for finance stocks; lower IR for existing stake; higher LRR for better SWF governance –Pre-event excess return raises both IR and LRR SWFs Have Suffered Large Losses In Listed Stocks –Will be somewhat less likely to re-invest in US, Europe

24. Thank You William L. Megginson wmegginson@ou.edu http://faculty-staff.ou.edu/M/William.L.Megginson-1/