Bad news for the world’s big fund managers: they are being abandoned by sovereign wealth funds. In each of the five years to 2015 these state run funds (largely owned by oil producing companies) shovelled something in the region of $48bn into the markets via the big asset managers. Last year, they pulled over $46bn out.
That, said the head of one large fund management firm, was “very hard”. It’s about to get harder.
Moody’s reckons the sovereign wealth funds will pull out the same again, plus another 25% this year “as oil-dependent funds increase redemptions from asset managers in order to plug fiscal deficits”. Norway alone says it is likely to pull out €8.4bn. This matters for fund managers – they get fabulous annuity-style income from running all this money – and Morgan Stanley estimates that the outflows are going to cost them not far off 5% of their earnings (and that’s assuming the numbers don’t rise).
But, according to some, the withdrawal of the sovereign wealth funds isn’t just a financial problem for fund managers, it might be a downer for the future of capitalism, too. As I have noted rather too many times, one of the problems with modern shareholder capitalism is that it is dominated not by individual shareholders (who are too dispersed to have any influence) but by fund managers with a strongly incentivised bias to short-termism.
Sovereign wealth funds, says the FT’s Martin Sandbu, offer some counterweight to this. They are “universal investors” – they invest in everything, everywhere. They are very big investors (no one can ignore their demands). They have a unity of purpose (one master – a state). And they are “explicitly long-term investors – mandated to fund future pensions or even more open endedly to benefit (presumably all) future generations”. That means they have huge power to change corporate behaviour – and the incentives to need to change it for the better. They need companies to survive and to grow over the long term much more than they need to see good quarterly earnings on a regular basis.
Sandbu’s right that all this matters – and he is right that sovereign wealth funds should be a force for good in the market. Unfortunately, it isn’t always so. Big state-run funds are just as prone to corruption, short-termism and stick-in-the-mud-ism as anyone else.
Look to Japan, where the Government Pension Investment Fund has been blocked from investing directly in any more equities until 2019, because it already has huge influence in the market (it owns 7% of the shares listed in Japan) but it isn’t using it very well.
It has, say its critics, failed to publicly embrace one of the three arrows of the Abenomics growth programme — across-the-board improvements in corporate governance. Indeed, as the FT points out “mention of Japan’s corporate governance code, which came into force in June 2015, was “conspicuously absent” from any of the GPIF’s investment policy documents”.
Like so many things, the idea that sovereign wealth funds can save capitalism is great in theory. But it hasn’t yet stood up in practice. All other ideas welcome…