Finance Thesis (sovereign wealth funds)

GEKKO135

Hi all,

So basically i'm a couple of weeks away from the deadline date and i've begun to realize that my thesis isn't really much of a thesis (topic is Sovereign Wealth Funds). I'm doing a finance undergrad and the word length is 5000 so nothing extremely stressful.

I have a chunk of it done but it's yet to include any empirical analysis. The main issues/questions i'm trying to answer in my thesis are 1.The importance of SWFs and what are the risks associated with increasing regulation on SWFs? 2.What impact have SWFs had on stock performance since the financial crises in the U.S? The first part is mostly theoretical and i've formulated a couple of ideas to argue my anti-regulation case, but the second part is proving difficult. To be honest the models used in most of the working papers seem very complex and all I really understand from my course is how the CAPM can be used, however, data is only available on Lexusnexus and Datastream by the looks of it...which are both subscription based sites.

So basically if anyone out there has any idea where i can get data on sovereign wealth fund investments in the U.S i'd love to hear from you. If not do you think it would be sufficient to just expand on part 1 of my thesis and have no empirical analysis? any help would be great as I dont really know what is expected of me. thanks a mil

soddy1979

Well start by getting your hands on the annual reports of the various Sovereign wealth funds. If you are looking at investments in the US, you can certainly look at China Investment Corporation and The Bank of Japan. A quick Google came across this, which might have pointers on where to look.

http://www.swfinstitute.org/

Re: In it's most basic form, the impact on stock performance is as follows, basically as the wealth funds buy up US treasuries, they flood the US with Dollars, which in turn leads to inflation and better stock performance. I'm not sure how you would disaggregate the effects of SWF's and other investors though.

soddy1979

Increased supply of treasury bonds leads to a reduction in the risk-free rate (as represented by treasury bonds) - the Rf part of the CAPM.

E(R) = Rf + B[E(Rm)-Rf]

This reduces the risk premium which in turn increases the price of stocks when looking over any particular investment horizon. You can see that from a simple constant growth model for valuing stocks:

P = D1/[E(R)-g]

We can see that P is inversely related to E(R).

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If you didn't want to use the CAPM model, you could use the Fed Model

http://en.wikipedia.org/wiki/Fed_model

Similarly to CAPM, as the 10 year yield decreases, so should equity yields. You should beware though, that most practitioners will use the value of the Fed model, relative to it's historical values, as opposed to it's absolute value to make investment decisions.
_________

GEKKO135

Thanks for your help Soddy1979.

The SWFinstitute was indeed my first port of call but most of the good research data is blocked from non subscribers.

Your treasury bond analysis is certainly helpful but I was going to try and be more specific and look at the performance of financial institutions equities since the SWF acquisitions were made in 2007/2008. From what I've gathered the reason SWFs are topical is because of their lack of transparency and the fact that they are moving away from treasuries and towards equities. Shareholders are concerned about SWF agendas and whether they will have a negative affect on firm performance.

I found this paper which answers a lot of my questions...but i think it goes beyond what is expected of an undergrad.
https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=1P1ZWXB_Wfv3FEBDoiTsRqtvmjerS7QEM9kRjHg_uZOJFcIf6RjSaVn3V_vtA&hl=en

soddy1979

What you could do is, firstly, search for news of sovereign wealth funds buying up stock of financial institutions. After that pick a time period to measure (arbitarily let's say 3 month performance after announcement date).

You could then calculate the alpha in the financial institutions performance over the three months.

If you do this for a number of announcements, and also include a number of financials with no announcements, and perform a regression (include X variables of 1- size of investment relative to market cap 2- A binary announcement variable, 3- Size of the wealth fund), you will be able to assess all of these factors contribution to any alpha generated by those institutions over the time period.

GEKKO135

That certainly makes sense to me! I have a meeting with the supervisor tomorrow so at least now I have something to work with. I will make sure to give Soddy1979 a special thanks in its preface ha...Thanks for your help.