Business | Opinion
Sovereign wealth funds aren't so bad
Western countries in particular have regarded them with suspicion, worrying about the motives of a state's investment in what might be strategically important companies.
- By Sophia Grene, Financial Times
- Published: 00:00 October 14, 2009
SWFs are government-owned funds investing in domestic and international markets. Many of them are investing the money from selling natural resources such as oil in order to provide a stable source of wealth for future generations, while others manage their government reserves.
Western countries in particular have regarded them with suspicion, worrying about the motives of a state's investment in what might be strategically important companies.
However, their impact on international markets is less and they are more prepared to be open than general reports have previously assumed.
This is according to a report conducted by RiskMetrics on behalf of the Investor Responsibility Research Institute. As well as asking SWFs how much information they are prepared to make public, the report discovered the amount of money invested in international equities is not more than $1,000 billion (Dh3,678 billion)
"People had conflated the total of the SWFs with what they had available to invest," says Jon Lukomnik, a programme director at the IRRCi.
Less than half of the entire amount SWFs have to invest is in international equity markets.
At the end of 2007, Morgan Stanley estimated SWFs had $3,000 billion in assets and forecast that would rise to $12,000 billion by 2015.
Voluntary code
This total has now slumped to $2,600 billion thanks to collapsing asset values during the financial crisis, with growth expectations similarly dampened as governments use money they might have otherwise put in the funds to stabilise wobbling economies. Lower oil prices in the first half of 2009 also hit those SWFs relying on oil revenues for new capital.
As well as being less powerful than previously thought, the SWFs are starting to be more open about their investment practices.
A year ago, a group of 28 SWFs, working with the International Monetary Fund, drew up a voluntary code of practice — the Santiago Principles, that set levels of disclosure on subjects like the source of their funds, their investment objective and purpose, their structure and governance. Twelve months on, the IRRCi commissioned RiskMetrics to find out what progress had been made, hoping to bring some light into a murky corner of financial markets.
Emotionally laden
"We wanted to demystify some emotionally laden issues in the financial market place," says Lukomnik.
"There was nothing available on what SWFs do or don't do."
The report found few funds have so far come close to complying with the principles. The Norwegian Government Pension Fund Global and the Australian Government Future Fund both score highly, with the two Singapore bodies, Temasek and the Government of Singapore Investment Corporation close behind.
Qatari Investment Authority (QIA) and the Abu Dhabi Investment Authority are at the bottom of the rankings. In mid-table are the China Investment Corporation and the Libyan Investment Authority, both of which have previously been very secretive.
"Although it's less information than I would like, the amount that was available is still a surprise," says Lukomnik.
Although SWFs are not officially answerable to any international body and have no obligation to make any disclosures about the source of their funding, their level of investor engagement or any of the other things the Santiago principles call for, there are nevertheless good reasons for them to make some information public.
"In the short term, there is a self-interested reason: suspicion and nationalism prevented them from investing as they would wish to,' says Lukomnik, citing the fuss made in the UK when the QIA bid for food retailer J Sainsbury and the uproar in the US when state-owned Dubai Ports World bid for a number of American ports.
"When you are opaque and large and powerful, it breeds suspicion."
Lukomnik feels the longer term argument for the funds to build a better relationship with potential investment targets is even more cogent.
"When you are large enough to affect the market and have a long-term objective, the general robustness of markets matters to you."
In other words, the more transparent large investors are about their processes, the more efficient markets are likely to be, which should be in investors' interests.
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