Why CalPERS is not a Sovereign Wealth Fund?
3/10/2008
by Michael Maduell
There are significant similarities between public pension funds and sovereign wealth funds. They both control vast pools of capital, have tremendous power over company boards, and have varying degrees of government influence. In fact, a number of sovereign wealth funds have names like the Government Pension Fund of Norway and the Australian Future Fund. In addition, a sovereign wealth fund’s end goals and objectives might share similarities to a domestic public pension, like providing retirement benefits; however, there are some differences between the two.
The main disparity between sovereign wealth funds and public pension funds are their funding sources. Sovereign wealth funds are funded by foreign exchange assets stemming from commodity exports or transfers from current account surpluses. On the other hand, CalPERS and other domestic public pensions are funded by employee and employer contributions. Furthermore, the goals of most public pensions are clear, earn a return to fund projected benefit obligations. Sovereign wealth funds have a variety of goals and most have a mandate to earn excess returns, but is that true for all? Like most public pension funds, CalPERS has transparency and clear return objectives, two characteristics that are typically absent in most sovereign wealth funds.
As with any investment organization, CalPERS has engaged in investment restrictions based on management directives. These directives are based on good citizenship principles such as environmental stewardship, advocating human rights, and fair labor standards. A number of public pensions invest in socially responsible funds such as the Domini Funds which prohibit investments that violate fair labor standards and environmental codes. Their choice to not invest in a company is not a political strategy in the sense of influencing a firm to gain a significant competitive or resource advantage. Instead, it may be an attempt to promote certain types of positive behavior that benefits society. Having fair labor standards and sustainable environmental regulations are a benefit to all people. Is CalPERS buying international companies to ensure sure the firms push contracts, supply deals, or to disclose trade secrets to the US government? The answer is, of course not. Asking this same question about a sovereign wealth fund and the answer may be doubtful. What we can say for certain is that some sovereign wealth funds are too opaque to make a valid assumption about their intentions. If these wealth funds were more transparent, this would alleviate the mystery around them, thus ending the debate regarding political and other motives.
Transparency is a huge concern in many of the sovereign wealth fund debates. In contrast, CalPERS and other public pension funds have common characteristics including their willingness to share information regarding their goals, portfolio holdings, and governance to the public. Although some sovereign wealth funds, such as the Government Pension Fund of Norway are exceptional examples of transparency, many are not. It is important to remember that this fund is funded by foreign exchange assets, in particular oil. It is essential to not demonize sovereign wealth funds for choosing a path of non-transparency, this decision must be respected as the choice of an investor. It is equally vital to distinguish sovereign wealth funds from public pension funds. The two might share some common characteristics but they are different investment vehicles and should not be grouped in an identical investor class.
The views in this publication are expressed by Michael Maduell.
Michael Maduell is the Founder and President of the Sovereign Wealth Fund Institute.
Back to Michael Maduell's Research
|
