Sovereign wealth funds spark lively debate

At the Sovereign Wealth Management conference - hosted by Central Banking Publications in London on Thursday - calls for greater transparency by sovereign wealth funds were matched by demands from the funds themselves for fair regulatory treatment.

According to recent Morgan Stanley estimates, assets under management at sovereign wealth funds (SWFs) are approximately $2.9 trillion. Although small compared with the combined size of the global bond and equity markets (around $131 trillion), the activities of SWFs have come under scrutiny in recent years. And with the funds anticipated to grow to between $10 trillion and $15 trillion by 2015, this focus is likely to intensify.

Opinions expressed at the event highlighted the concerns some western institutions have regarding SWF investment decisions. Fears are driven, to some extent, by potential security issues caused by foreign public ownership of strategic assets as well as the effects on financial stability SWF investment might have.

Herve Ferhani, deputy director, monetary and capital markets department, at the International Monetary Fund, acknowledged SWFs can bring clear benefits to recipient countries, citing recent capital injections into global investment banks, which helped the sector mitigate market stresses.

Nevertheless, Ferhani added SWFs can also “impact stability and have the potential to cause market disturbances.” To allay market fears, Ferhani called for greater transparency and use of best practices by SWFs.

Robert Kaproth, director of international monetary policy at the US Department of the Treasury, remarked: “SWFs have attained systemic importance, and it is only proper that we think through the implications of that. Governments have to be vigilant on legitimate issues surrounding cross-border investments.”

Kaproth continued by saying the US has long benefited from commercially driven foreign investment, but argued SWFs need to be more open about their activities.

Shahmar Movsumov, executive director at the State Oil Fund of Azerbaijan, responded by accepting the importance of transparency, clearly defined objectives and good governance. However, somewhat pointedly, he commented “governments in recipient countries also have a part to play in having clearly defined and enforced regulations. Inefficient protectionism is also evidence of national strategic interests”.

Thomas Ekeli, investment director at the Norwegian ministry of finance, concurred with that view. “Politically driven decisions are often made by recipient countries, not the funds themselves,” he said. “If funds are able to manage reserves properly, this can give a massive boost to their own and the recipient’s economy.”

According to Knut Kjaer, former chief executive at Norges Bank Investment Management, SWFs should respond to calls for improved transparency because it is in their best interests, not to placate foreign governments.

“Recipient countries should not discriminate on capital because of its source: SWFs should be welcomed as liquidity providers” he commented. “The big issue is how to get sovereign agencies to manage money in a professional way so they can maximise returns and efficiency.”

To achieve this, “funds need to set out clear objectives and governance practices, empower people within their organisation, and separate political and investment goals,” Kjaer concluded.

See also: Sovereign Wealth Saviours