5.1 Investment policy–related guidance within the Santiago Principles

manager the responsibility for investing the assets of the fund (see table 5.1 on the broad distinction between investment policy and strategy for a SIF).

The investment policy serves multiple governance purposes. It commits and tethers the sponsor to a long-term vision for the fund, tempering the risk that subsequent and conflicting political priorities may undermine that vision.1 The policy is an important aspect of concretizing the accountability framework of the SIF, requiring the fund to behave with predictability within stated boundaries (Alsweilem and rietveld 2017) and providing a yardstick against which governing bodies can judge the intended activities of the manager.2 It also provides the framework within which the financial performance and economic impact of the fund will be monitored and assessed.

The investment policy is usually outlined in the SIF’s legislation, in ancillary regulation, or in policy documents of the sponsor, and is typically disclosed on the SIF’s website.Because the investment policy is essential to the accountability framework of any public sponsor–anchored fund, including SIFs, best practice demands public disclosure of the policy3 (see box 5.1 on the Santiago Principles, outlining the key guidance provided to SWFs on investment policy and strategy).

BOX 5.1

Investment policy–related guidance within the Santiago Principles

The Santiago Principles include the following generally accepted principles and practices (gAPPs) related to sovereign wealth funds (SWFs):

GAPP 18. Principle

The SWF’s investment policy should be clear and consistent with its defined objectives, risk tolerance, and investment strategy, as set by the owner or the governing body(ies), and be based on sound portfolio management principles.

GAPP 18.1. Subprinciple. The investment policy should guide the SWF’s financial risk exposures and the possible use of leverage.

GAPP 18.2. Subprinciple. The investment policy should address the extent to which internal and/or external investment managers are used, the range of their activities and authority, and the process by which they are selected and their performance monitored.

GAPP 18.3. Subprinciple. A description of the investment policy of the SWF should be publicly disclosed.

GAPP 19. Principle

The SWF’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy, and based on economic and financial grounds.

GAPP 19.1. Subprinciple. If investment decisions are subject to other than economic and financial considerations, these should be clearly set out in the investment policy and be publicly disclosed.

GAPP 19.2. Subprinciple. The management of an SWF’s assets should be consistent with what is generally accepted as sound asset management principles.

GAPP 21. Principle

SWFs view shareholder ownership rights as a fundamental element of their equity investments’ value. If an SWF chooses to exercise its ownership rights, it should do so in a manner that is consistent with its investment policy and protects the financial value of its investments. The SWF should publicly disclose its general approach to voting securities of listed entities, including the key factors guiding its exercise of ownership rights.

GAPP 23.0. Principle

The assets and investment performance (absolute and relative to benchmarks, if any) of the SWF should be measured and reported to the owner according to clearly defined principles or standards.

Source: IWG 2008.

Public capital SIFs usually formulate their investment policy (or clarify how the policy will be formulated) within the establishment law and ancillary regulation. The investment policy of the Ireland Strategic Investment Fund (ISIF), for example, is articulated in the national Treasury management Agency (Amendment) Act 2014 (nTmA Act 2014). The nigeria Sovereign Investment Authority (establishment, etc.) Act, 2011 (nSIA Act 2011) provides broad investment guidelines, whereas investment policy for nSIA’s nigeria Infrastructure Fund (nIF) is published separately on the fund’s website (nSIA 2019).4 The establishment law for Senegal’s FOnSIS (Fonds Souverain d’Investissements Stratégiques, or Sovereign Fund for Strategic Investments) sets the fund’s strategic orientation and delegates the definition of the investment policy to the fund’s board.5 unlike public capital SIFs, mixed capital SIFs typically clarify the investment policy in the private placement memorandum, the main document used to market the fund to prospective investors, often commingling investment policy and strategy under a single umbrella. As anchor investor, the public sponsor plays a significant role—along with the internal or external fund manager—in defining the content of the memorandum. The policy or board documents of the public sponsor approving the latter’s investment in the fund will also likely refer to the fund’s investment policy or core elements of it. For instance, the proposal of the Asian development Bank (AdB) to its board of directors to create Asia Climate Partners (ACP), together with asset managers OrIX and robeco, contains the broad investment doctrine for the fund (AdB 2012).6

Investment strategy

The investment strategy translates the policy into detailed guidelines for the fund manager on permissible investments and transaction structures. Core elements of the investment strategy, discussed in detail later, include particulars on target sectors and geographies, admissible capital instruments, ability to take majority or minority stakes, size of individual investments, and co-investment strategy.

A rigorous definition of the investment strategy serves several purposes. The strategy is critical to guiding the investment activities of the external fund manager or internal investment team appointed to manage a SIF. It informs the structural elements of the SIF, such as its size, organization, and human resources needed for the implementation of the strategy.7 For mixed capital SIFs that mobilize external capital at the fund level, the investment strategy is also a core component of the fund’s marketing efforts and materials, helping fund managers target the most appropriate set of potential fund investors.8

The investment strategy is clarified within the investment policy statement of the SIF, in ancillary documents, or in the marketing material of the fund. In a typical PCF, whose fund manager has sole responsibility for developing the fund’s thesis, the investment strategy is contained in the marketing materials the manager uses to mobilize capital from investors. By contrast, in the case of a SIF for which the public sponsor has conceived the fund’s purpose, the investment strategy is crafted in response to the public sponsor’s investment policy and may be articulated in different fund documents depending on whether the fund is solely capitalized by a government or is seeking co-investors alongside the public sponsor. For instance, the nSIA Act 2011 (Article 41.1) requires the manager to develop rolling five-year investment plans for nIF, and nSIA provides details on nIF’s investment strategy within its annual reports. ISIF’s establishment act,