INTERNATIONAL: Sovereign Wealth Funds want Normal Treatment

Wednesday June 4 2008

In recent years we have witnessed leaders of Hedge Funds and Private Equity Funds reaching out to defend their track records. This year, the leaders of some of the world’s largest sovereign wealth funds (SWF’s) have their turn.

At the OECD Annual meeting in Paris, representatives particularly from western countries expressed great concern on the potential impact of SWF’s to their economies.

The demarcation between SWF and other entities is not always clear cut, but SWF’s generally regarded as pools of assets owned and managed directly or indirectly by governments to achieve national objectives. These funds have raised concerns about:

i) financial stability;

ii) corporate governance;

iii) political interference and protectionism and

iv) lack of transparency.

At the same time governments have formed other large pools of capital to finance public pension systems, i.e. Public Pension Reserve Funds (PPRFs).

There is a concern by some countries regarding the control of these ‘mega funds’ (currently estimated at about £ 1.5 trillion). The concern is that the control of these funds rests with countries mainly in Asia having the potential of buying stakes in strategic industries to gain technology secrets or even exercise political motives.

Countries like France and Germany have been particularly vocal in addressing this issue, even recently calling for a set of guidelines and principles to be put in place by the European Commission for the purposes of regulating SWF activities.

Xiqing Gao, a delegate from China and head of the China Investment Corporation (CIC) which holds about £150 Billion, while speaking at the meeting said “We are financial investors and passive investors. We are only seeking good financial returns with an acceptable level of risk.”

Norwegian Finance minister in defending the purposes of Norway’s approximately £200 Billion SWF said `To my knowledge, there is no case of a sovereign fund investing on (any) other criteria than maximising profit.`

The European Council in its meeting which was held earlier in March stated that the European Union is committed to an open global investment environment based on the free movement of capital and the effective functioning of global capital markets. The Council also acknowledged SWFs useful roles as capital and liquidity providers with long-term investment perspective, qualifying by noting that the emergence of new players with a limited transparency regarding their investment strategy and objectives has raised some concerns relating to potential non-commercial practices. The European Council supports the objective of agreeing at international level on a voluntary Code of Conduct for SWFs and defining principles for recipient countries at international level.

EU Trade commissioner Peter Mandelson in his speech to Sovereign Wealth Fund Managers at the OECD, argued that SWF’s should be welcomed in Europe, and that existing funds had been benign and effective investors for more than thirty years. He says: `We should be much more worried if these investors were not interested in Europe. If they did not rate the Euro as a safe reserve currency. If they did not want to invest in Euro-denominated assets. Our response should emphasise the positive rather than the paranoid.”

For more information on Sovereign Wealth Funds click on the below links:

* European Trade Commissioner addresses Sovereign Wealth Fund Managers

* European Commission discusses Sovereign Wealth Funds

* OECD publishes document on Sovereign Wealth and Pension Fund Issues