The Role of Sovereign Wealth Funds in Global Investment Portfolios

Abstract

Based on the mixed methods research design that combines quantitative econometric modelling and qualitative thematic analysis, this paper concentrates on the location of international investment portfolio of SWFs. Using the largest SWF dataset, we report highly significant positive impacts of SWF on portfolio diversification and portfolio stability through allocation in: equities, bonds, real estate, infrastructure and alternative assets. Finally, the econometric results show that there is a positive and statistically significant relationship between SWF investment and portfolio return, in particular after diversification into the alternative asset classes. Secondly, the qualitative analysis highlights the strategic and geopolitical drivers of investment decision-making and there are common themes about governance, transparency and ESG integration as features of global investment practice. The estimates of the SWF's liquidity contribution also suggest the countercyclical role of the SWF during financial crises, during which the SWFs were the liquidity provider and long-run stabilizer of the global markets. Furthermore, the newly defined sustainability theme is re-affirming that the climate finance field is becoming even more pertinent, in the context of UN Sustainability Goals. However, the paper also touches on risks associated with political imperative, domestic centralisation of projects, and geopolitical risk - the risk of compromising longer-term financial sustainability. Overall, the evidence demonstrates that SWFs are not only stabilising financial agents, but transformational institutions, which are knitting together economic policy, global finance governance and sustainability into re-shaping the composition and resilience of global investment portfolios.