Sovereign wealth funds (SWFs), around for nearly 50 years, have only recently given rise to concern in advanced countries.

Edwin Truman of the Peterson Institute, a Washington-based economic think-tank, suggests this is because their rapid recent growth in developing countries reflects a shift in global economic power.

One must also consider the role of governments. Many of those behind the funds are not traditional friends of the West, and there is a growing fear that SWFs will be used for political and strategic ends, especially since China joined in.

Some worry that the SWFs might introduce a new form of state ownership of strategic assets in the developed world.

Lack of activism

A broader concern is their lack of transparency, which raises questions about potential market abuse. Some western fund managers also argue, paradoxically, that a lack of activism could become a problem, creating a governance vacuum. Certainly the governance of the funds, with notable exceptions such as that of Norway, tends to lack accountability to the population of their countries.

Yet many of the criticisms aimed at SWFs are hypocritical. The investment policies of US state pension funds, such as Calpers, the Californian state employees' fund, for example, have been overtly political and pro-union.

Meantime, the SWFs have trodden the political minefield with relative delicacy. The China Investment Corporation, for example, takes stakes of more than ten per cent in companies only with their agreement and avoids sensitive sectors such as defence. At any rate, where developing countries want to invest strategically, say, to secure access to natural resources, they have other means available.

In its attempt to derail Anglo-Australian miner BHP Billiton's bid for PotashCorp of Canada, China has used a corporate vehicle, Sinochem, not one of its SWFs.

SOVEREIGN ACTIVITY

  • During the first half of this year, 16 of the 33 funds on the Monitor database executed 92 investments valued at $22.2 billion — a 20 per cent increase in deal volume, but less than 40 per cent of the value of SWF investments in the preceding six months.
  • Compared to the first half of 2009, SWFs doubled the number and investment value of deals in the first six months of 2010.
  • Three sectors stood out in their investment patterns: financial services (19 deals, $7.4 billion); natural resources (16 deals, $4.3 billion); and utilities (6 deals, $4.3 billion).
  • Europe was the largest market for SWF investment in terms of recorded value, accounting for almost 40 per cent of the total. North American assets were also proportionately more attractive to SWFs, accounting for a third of the value of investments recorded. OECD markets accounted for nearly three quarters of the total deal value.
  • Asia-Pacific accounted for the largest number of deals (28) in the first half of this year. North America was the second most popular region (22 deals).
  • The most active funds were Temasek Holdings (20 deals), the China Investment Corporation and the Qatar Investment Authority (both 14 deals). CIC and QIA were the largest spenders accounting for a third and a quarter of the total SWF investment value, respectively, and eight of the ten largest investments for the period.