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ack of confidence in financial markets has driven investors and funds away from corporations. As balance sheets deteriorate, companies are in need of more and more capital, which investors are not willing to provide. In this setting, sovereign wealth funds (SWFs) have emerged as the funding source of the next few years. SWFs manage more than $3,000 billion. To put this figure into perspective, the hedge fund and private equity markets combined account for less than $2,000 billion. Some estimates suggest that SWFs will manage more than $10,000 billion by 2015.

However, SWFs' investment strategies and potential political agendas remain controversial. This article is based on research at IMD covering more than 20,000 SWF holdings across 7,000 companies and covers funds' stock holding in 58 countries' stock markets.

Where do SWFs invest?
Although definitions vary, SWFs are essentially state-owned investment funds that invest in international financial markets. They invest in virtually all countries in the developed world, and a few emerging market economies. As market players, they are certainly a driving force, holding positions in almost one-fifth of companies worldwide. The typical position taken by an SWF is not a controlling stake. On average, an SWF takes 0.74 percent of the shares outstanding in a company. In dollar terms, the average position is $46.3 million. Indeed, their level of control only reaches 50 percent in less than 1 percent of their investments.

Compared with typical companies in the global market, companies held by SWFs are significantly larger, more liquid and have proven records of profitable growth. Companies held by SWFs also tend to have significantly higher institutional ownership and analyst coverage than the rest.

SWFs are often opportunistic. They step into companies when their stock prices fall. They are also more inclined to invest in countries where legal protection of investors is stronger. In other words, they may bring in good governance, but only to the extent that the legal regime guarantees a minimum protection to their investment. As with other non-sovereign investment vehicles (Calpers, the California state pension fund, for example), corporate governance considerations are, therefore, important determinants of SWFs investment strategies.

It is often argued that SWFs invest in western companies as a means of gaining corporate intelligence, but our results show that SWFs do not display any preference for high-tech or research- and development-intensive companies.

Impact on company value
The valuation impact of SWFs is sizeable. Economic analysis shows that in the year when a SWF invests in a company, the ratio of the market value of the company to its book value increases by 15 percent. Put in simple terms, this finding suggests that general shareholders benefit - a lot - from SWFs investing in their companies. Furthermore, the impact of SWFs goes beyond that of the typical institutional investor: the market pays on average a much higher premium for businesses where SWFs have a stake than in organizations which are owned by general institutional investors.

Everything else being equal, the market prefers SWFs to any other institutional investor.

Benefits of SWF ownership