Sovereign Wealth Management

Sovereign Wealth Management

Moderators: Rawi E. Abdelal, Professor of Business Administration
Richard H.K. Vietor, Senator John Heinz Professor of Environmental Management

Panelists: Manish Kejriwal, Senior Managing Director, Temasek Holdings Advisors India Pvt. Ltd.
Knut N. Kjaer, Former CEO, Norges Bank Investment Management
William Miracky, Senior Partner, Monitor Group

However, while not new, the number of sovereign wealth

Overview funds has increased significantly in recent years. Mr.
Kejriwal said that since 2000, ten new funds have been
Significant recent investments by sovereign wealth funds in founded, from countries like China and Russia. And Mr.
troubled U.S. financial services firms have put sovereign Miracky said that half of the funds in existence today have
wealth funds under the spotlight. Because these funds often been established since 2005.
lack transparency, many observers have wondered about the
practices and intentions of these funds, expressing concern Collectively, sovereign wealth funds manage about $2.5
that sovereign wealth funds are using their investments for trillion dollars, with about 70% of the capital in sovereign
political purposes. wealth funds coming from oil and other natural resources.
This $2.5 trillion is a great deal of money, but it only
The consensus of this panel, supported by a detailed represents about 2% of all the global equities and 5%
analysis of the investments made by sovereign wealth funds, of the total assets managed by the private sector.
is that sovereign wealth funds are run by professional
investors. They don’t have a political motivation; their interest
The developed world worries about the motives of
is in maximizing their fund’s long-term risk-adjusted returns. emerging market sovereign wealth funds.
Mr. Kejriwal explained that concerns from the developed
Context world about the sovereign wealth funds of developing
Professor Vietor provided a short history of sovereign wealth countries typically center around:
funds and Mr. Miracky shared data from research on them.
Lack of transparency. These funds are not required to
The other two panelists, both of whom are involved in disclose the quantity of their assets, their investments,
managing major sovereign wealth funds, offered their or their results. While some funds choose to disclose
thoughts on the motivations and practices of these funds. this information, others do not, leading to a perception
of secrecy.
Key Takeaways
The reversal of privatization. Having huge amounts of
assets managed by people who are working for the

Sovereign wealth funds are not new in concept but government is concerning to many.
are increasing in significance and number.

Wealth transfer. The developed world is concerned that
Mr. Miracky offered the following definition of sovereign
through the assets sovereign wealth funds purchase
wealth funds, suggesting that they must:
from developing countries, wealth is being transferred.

Be owned by a sovereign government.

Use of funds for political objectives. The lack of trans-

Be managed separately from the official reserves of parency and perceptions of secrecy make some wonder
the central bank or monetary authority. whether these funds have been created to achieve

Invest in a range of asset classes, particularly foreign political objectives rather than optimize returns. This
assets. concern is heightened by the fact that the new funds
created in recent years are from countries like China
Mr. Miracky found 36 funds that met this definition. After and Russia where there have been geopolitical tensions
assembling all publicly available information on these with the West.
funds, his research concentrated on 17 of them.
“Many people naturally assume that the intentions
Sovereign wealth funds feel like a recent concept because of these funds are to advance political objectives.”
of how much they have been in the news in recent months
Manish Kejriwal
related to investing more than $50 billion in U.S. and Swiss
banks.

Concern about the impact of sovereign wealth funds
is overblown.
But sovereign wealth funds aren’t new. Professor Vietor
explained that the first fund was the Kuwait Investment Mr. Miracky’s data show that fears about the political
Authority, established in 1953. Other major funds and their motives of sovereign wealth funds from developing
year of inception include: Singapore’s Temasek fund markets are more hype than substance.
(1974); the sovereign wealth fund of Abu Dhabi (1975);

The investments are balanced. Press coverage
and the Government Pension Fund of Norway (1993).
suggests that sovereign wealth funds are buying up
assets in the developed world. The data disprove this.

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©2009 President and Fellows of Harvard College
 Sovereign Wealth Management

Based on the number of transactions, two-thirds of the
Creation of a professional investment-management

deals are in emerging markets. Based on the amount of organization. After the government officials set the
dollars invested, 60% of the dollar value is in deals in guidelines, Norway’s professional investment-manage-
the developed world, but 40% is in the sovereign wealth ment organization is given the autonomy to make day-
fund’s region and 20% is actually in the home market. to-day investment decisions without government
interference. This organization, established from scratch
After the investments in the financial sector, over the
by Mr. Kjaer in 1997, is a part of Norway’s government,
past six months there have been almost no investments but it isn’t a typical government entity. The autonomy,
by sovereign wealth funds in North America. (In the first the culture of the organization, and a compensation
quarter of 2008, sovereign wealth funds invested $23 structure based on performance help attract a highly
billion in North America; in the second quarter, it was professional team, which now manages 158 portfolios.
down to $1 billion.)

Control is not the primary goal. While sovereign wealth “You don’t get professionals to join your
funds take controlling stakes in about half of the deals organization when somebody else from outside is
that they do, most of the deals where a controlling stake calling in and interfering in your investments.”
occurs are smaller investments in developing markets.
Knut N. Kjaer
Few of the deals in developing markets have yielded a
controlling interest. And, only 3% of the investments by
Transparency. Mr. Kjaer believes that sovereign wealth
sovereign wealth funds have resulted in a controlling funds that provide transparency are rewarded with trust
stake of a company in the developed world in a from both their government and citizens. In addition,
politically sensitive industry such as telecom, utilities, transparency can mean that governments, rather than
aerospace, or defense. the funds themselves, can decide upon general
diversification policy guidelines.
“The concern over these funds was very overblown
given what you see in actual deal activity.” Singapore’s Temasek fund has many similarities:

William Miracky
Separation of power. The government of Singapore,
which owns 100% of Temasek, wanted to separate the

Responsible behavior is likely. As these funds become
fund’s role as wealth creator from the government’s
more involved with the global economy, they have an regulatory role. It did this by creating a completely
increasing incentive to behave in a way that does not separate entity.
destabilize the global financial system.

Not technically a fund. Officially, Temasek is a
Both Mr. Kjaer and Mr. Kejriwal were clear that the sole company, not a fund. At Temasek’s formation, the
objective of their funds is to maximize the risk-adjusted equity of several different government-owned com-
returns. Their governments don’t have political objectives panies was put into Temasek based on the govern-
related to their funds, just investment objectives. ment’s belief that this was the best way to maximize the
value of these companies. Temasek’s philosophy is that
“Sometimes we feel a bit misunderstood . . . but of any other company: to maximize profits and returns.
we’ve been doing this with one purpose in mind: Just

Independent board structure. The board members of
to maximize returns.” Temasek are independent from the government and are

Manish Kejriwal
from all over the world. No one from the government is
involved in or influences the investment decisions.

The governance and organizational structure of a
sovereign wealth fund is critical to how it operates
S&P and Moody’s rated AAA. Four years ago Temasek
and the results it produces. chose to open its books to get rated. As one of only
about 12 corporations in Asia with an AAA rating, this
In Norway, pension expenses for retirees are expected to
showcased the company’s transparency and account-
double as a percentage of Norway’s GDP as oil revenues
ability to bondholders; created a built-in market feed-
decrease. Thus, the rationale for having a sovereign
back mechanism; and gave Temasek an alternate way
wealth fund is to mitigate the risks related to the country’s
to raise investment money as a source of cash.
oil revenues and to produce higher returns than are
provided by oil. ($1 invested in oil one hundred years ago Both Norway’s sovereign wealth fund and Temasek have
would have returned $2 over that time; $1 invested in generated outstanding results. Norway’s assets have
equities would have returned $434.) So, taking revenues grown to $400 billion and over its 35 years, Temasek has
generated by oil and investing those actually lowers the delivered an annual return of 18%.
country’s risk and increases the returns. Key aspects of
how Norway’s sovereign wealth fund is managed include:

Clear governance. The Minister of Finance and the
Parliament set investment guidelines regarding the level
of risk they are willing to take and establish benchmarks
for performance.

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©2009 President and Fellows of Harvard College
 Sovereign Wealth Management

Recipient transparency. Mr. Miracky pointed out that not

Other Important Points only are disclosure and transparency needed by sovereign
wealth funds, but there should also be guidelines for

Essential reading. Mr. Miracky is co-author of Assessing disclosure of investments by recipients.
the Risks, a recently published Monitor Group report about
sovereign wealth funds which Professors Abdelal and
Economic development objectives. While the panelists
Vietor referred to as a seminal work. professed to not have political objectives associated with
their investments, they acknowledged that some sovereign

Global rules. Mr. Kejriwal explained that Temasek has wealth funds invest part of their funds domestically and are
been working closely with the International Monetary Fund pursuing both favorable returns and economic develop-
to establish a set of consistent disclosure rules that would ment objectives.
apply to all sovereign wealth funds. However, an audience
member voiced a concern that regulating sovereign wealth
Real estate investments. Of some surprise, the area that
funds while not regulating other types of investments, like attracted the most capital from sovereign wealth funds in
hedge funds, might lead to even more problems in the the second quarter of 2008 was real estate.
global market.

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 Speaker Biographies

Speaker Biographies
Rawi E. Abdelal (Moderator) Telecommunications (1989), and Government, Industries,
Professor of Business Administration and Markets (1990). His books include Environmental
Politics and the Coal Coalition (1980), Energy Policy in
Rawi Abdelal is a professor at HBS in the Business, America Since 1945 (1984), Telecommunications in
Government, and International Economy unit. His main area Transition (1986), Strategic Management in the Regulatory
of expertise is the international political economy, and he is a
Environment (1989), Contrived Competition (1994),
faculty associate of Harvard’s Davis Center for Russian and Business Management and the Natural Environment (1996),
Eurasian Studies and Weatherhead Center for International Globalization and Growth: Case Studies in National
Affairs. Economic Strategies (2004), and How Countries Compete
(2006).
Abdelal’s first book, National Purpose in the World Economy,
won the 2002 Shulman Prize as the outstanding book on the For his courses in business-government relations and
international relations of Eastern Europe and the former environmental management, Vietor has published more than
Soviet Union. His second book, Capital Rules, explains the
three dozen case studies on international energy issues; on
evolution of the international financial system’s social norms the regulation of natural gas, nuclear power, air pollution,
and legal rules. Abdelal is now at work on The Price of and hazardous wastes; and on strategy and deregulation in
Power, a book that explores the relationships among political airlines, railroads, telecommunications, and financial
leadership, state-building, foreign investment, and services. He has been a consultant to the Hudson Institute
geopolitics in the Russian energy sector. and the Energy Research and Development Administration
and is a consultant to IBM, General Electric, Anglo
In 1999 Abdelal earned a Ph.D. in government from Cornell American, and the government of Malaysia.
University, where he had received an MA in 1997. At Cornell
Abdelal’s dissertation won the Kahin Prize in International Vietor is married and lives in Wellesley, Massachusetts.
Relations and the Esman Prize. He was a President’s
Scholar at the Georgia Institute of Technology, where he
received a BS with highest honors in economics in 1993. His Manish Kejriwal, MBA 1995
recent honors include HBS’s Robert F. Greenhill Award and Senior Managing Director, Temasek Holdings Advisors
the Student Association’s Faculty Award for outstanding India Pvt. Ltd.
teaching in the required curriculum.
As senior managing director of Temasek Holdings Advisors
India Pvt. Ltd., Manish Kejriwal oversees the overall interests
Richard H.K. Vietor (Moderator) of Temasek Holdings in India. He is also a senior managing
Senator John Heinz Professor of Environmental director of Temasek Holdings Singapore, where he is in
Management, Senior Associate Dean charge of the financial-services portfolio and has oversight of
Russia.
Richard Vietor, the Senator John Heinz Professor of
Environmental Management and senior associate dean at Temasek Holdings is an Asian investment firm with a
HBS, teaches courses on the regulation of business and diversified portfolio of over US$100 billion. Established in
the international political economy. He received a BA in 1974, Temasek holds and manages investments in
economics from Union College (1967), an MA in history from companies involved in a wide range of business activities,
Hofstra University (1971), and a Ph.D. in history from the
from port, shipping and logistics, and banking and financial
University of Pittsburgh (1975). He was appointed professor services to airlines, telecom and media, power and utilities,
in 1984. and rail. Many of these are leading companies in Asia such
as Singapore Airlines, Singapore Telecom, Singapore
Before coming to HBS in 1978, Vietor held faculty appoint- Technologies, PSA Corporation, DBS Bank, ICICI Bank, and
ments at Virginia Polytechnic Institute and the University of Standard Chartered Bank. Temasek is among the most
Missouri. He is the recipient of a National Endowment for the active buy-side firms in Asia and has invested over $20
Humanities Fellowship and Harvard’s Newcomen Fellow- billion in the last three years. It has delivered an 18% annual
ship. In 1981 he received the Newcomen Award in business
average compounded total return to its shareholder since its
history. He serves on the editorial board of the Business inception.
History Review, the advisory board of IPADE in Mexico, and
the Infrastructure Committee of the Competitiveness Policy Before joining Temasek Holdings, Kejriwal was a partner at
Council. He was president of the Business History Confer- McKinsey & Company and had been part of its New York,
ence for 1993–1994. Cleveland, and Mumbai offices. Before McKinsey, Kejriwal
worked at the World Bank in Washington, D.C., and spent
Vietor’s research on business and government policy has the summer between his two business school years with
been published in numerous journals and books. He has
Goldman Sachs (principal investment and corporate finance)
contributed chapters to America versus Japan (1986), Wall in Hong Kong.
Street and Regulation (1981), Future Competition in

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©2009 President and Fellows of Harvard College
 Speaker Biographies

Kejriwal received a BA from Dartmouth College, where he William Miracky

graduated magna cum laude with a major in economics and Senior Partner, Monitor Group
engineering sciences. He holds an MBA from HBS, where
he graduated with high distinction as a Baker Scholar. Bill Miracky is a senior partner at the Monitor Group, working
out of the Cambridge office. His responsibilities include client
Kejriwal is a member of the boards of Fullerton Financial service and management in the firm’s national economic
development and security practice.
Holdings Pte. Ltd., Bajaj Auto Ltd., and Kejriwal Stationery
Holdings Ltd. He is a member of the Young Presidents’
Organization and was named a Young Global Leader by Since joining Monitor in 1993, Miracky has managed client
the World Economic Forum in 2006. relationships and projects in a variety of industries
internationally in the firm’s core strategy consulting practice.
He has worked at the CEO and board levels of a number of
Knut N. Kjaer, AMP 165 (2003) Monitor’s largest relationship clients. The work has included
Former CEO, Norges Bank Investment Management corporate portfolio strategy, business unit strategy,
organization design and transformation, and marketing
Knut Kjaer served as the CEO of Norges Bank Investment
strategy. Miracky coauthored Monitor’s June 2008 report
Management since its inception in 1997, stepping down on Assessing the Risks: The Behavior of Sovereign Wealth
January 1, 2008. As CEO, he was responsible for managing Funds in the Global Economy and has spoken widely on the
the Norwegian Government Pension Fund (the Oil Fund) topic of SWFs.
and managing Norway’s foreign reserves. The total funds
under his management were more than US$400 billion by Before joining Monitor, Miracky served in the economic
the end of 2007. research division of the Board of Governors of the Federal
Reserve in Washington, D.C. He has done pro bono work for
Kjaer has a master’s degree in economics and a degree in
the Massachusetts Governor’s Council on Economic Growth
political science from the University of Oslo. He attended the and Technology, on issues of regional macroeconomic
Advanced Management Program at HBS in 2003. growth. He also works with New Profit Inc. as a CEO coach
to social entrepreneurs in their investment portfolios.
He has been a researcher in the Department of Economics
at the University of Oslo and with Statistics Norway. In 1986 Miracky received his Ph.D. in economics from MIT, where
he cofounded and became a partner of the Economic his fields of study included industrial organization and
Analysis Centre, ECON. From 1994 to 1997 he was EVP of econometrics. His studies were supported by NSF Graduate
Storebrand, a listed company within the financial sector. He
and Alfred P. Sloan Foundation fellowships. He graduated
has also been a member of the board and deputy chairman Phi Beta Kappa, with honors and distinction, from Stanford
of the Oslo Stock Exchange and chairman of the board of University with a dual major in economics and history.
the Centre for International Climate and Energy Research
Oslo. In 1995–96 he was chairman of the board of Miracky resides in Newton, Massachusetts, with his wife and
Storebrand Bank. their three sons.

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