Portfolio Allocation for Sovereign Wealth Funds in the Shadow of Commodity Based National Wealth

Abstract:     
Most sovereign wealth funds depend heavily on oil revenues to increase the capital base. Research on the investment performance of sovereign wealth funds however has focused on the returns to their financial asset portfolio. Given their reliance on the monetization of natural resource to increase the financial assets, it would better to account for national wealth returns by including oil price movement as a weighted part of the total portfolio. To correct for this, we simulate a dynamic portfolio maximizing risk adjusted returns across a large asset basket accounting for the continual depletion of natural resource assets. We find that given the large volatility and continual depletion of oil as a portion of the national wealth, sovereign wealth funds would be best served investing in low volatility liquid fixed income and equity indexes to balance their portfolio. Even when allowing for three asset portfolios, returns are only maximized when oil as a percentage of national wealth drops to approximately 50%.

Number of Pages in PDF File: 23

Keywords: sovereign wealth funds, portfolio allocation, national wealth, oil surplus, simulation

JEL Classification: G11, G15, G17, G18

working papers series