Sovereign funds under microscope in Davos

 24 January 2008

 DAVOS – Sovereign wealth funds, with their deep pockets and government backing as they invest worldwide, drew criticism and praise at the World Economic Forum on Thursday.

Skeptics worried about their lack of transparency and the resistance from some fund owners to a universal code of conduct, while others said the concern was exaggerated.

“There is a lot of worry about sovereign wealth funds, but all of them are assumptions, they are not about real cases,” said Bader al-Saad, who heads the Kuwait Investment Authority.

Some of the assembled masters of business, finance and government were not so sure.

“The question is if we believe in market economies and we work very hard to create open markets and private enterprise _ shouldn’t we be concerned with transactions that have an element, albeit a small element, of cross border nationalization?” asked Larry Summers, a former U.S. Treasury secretary.

Found mostly in the oil-rich Middle East and Asia, but also in Russia and Norway, government-owned sovereign wealth funds control an estimated US$2.5 trillion in assets, with analysts predicting the value of their holdings could reach as much as US$12 trillion by 2015.

Critics contend the funds offer little transparency and could flex their political power by taking key stakes in foreign defense companies, major banks and other companies.

Singapore’s state-run Temasek Holdings and Government of Singapore Investment Corporation, or GIC, have made such investments. With assets of more than US$100 billion apiece, according to their Web sites, the two are among the world’s biggest such funds.

They, like funds from the Middle East and China, have been investing in major Western financial institutions that have lost billions of dollars on bad bets in the US mortgage market. Rising delinquencies and defaults among mortgages have forced banks to write down the value of bonds and debt backed by the troubled loans. Hard-hit US banks welcomed the needed capital.

GIC invested US$9.75 billion in UBS, the Swiss bank said in December. Later that month, Merrill Lynch said Temasek had bought a stake of less than 10% for at least US$4.4 billion and up to US$5 billion.

Earlier this month, Citigroup said it would receive US$6.9 billion from GIC for a 4% stake in the US bank.

Some argued that the funds play a major role in keeping world markets steady over the long-term, particularly now given the jitters that have enveloped them as fears of a US recession gain traction.

“They have always taken a long-term stabilizing role in financial markets,” said Muhammad Al-Jasser, vice governor of Saudi Arabian Monetary Agency. “I don’t think there are any difficulties in understanding who is investing where. We should not look at sovereign wealth funds as a risk and a danger.”

In Europe, French President Nicolas Sarkozy has criticized the funds, saying his government would defend “the primordial economic interests of the nation” against sovereign funds. In neighboring Germany, Chancellor Angela Merkel has pledged to keep close tabs on foreign investments in German companies.

Norwegian Finance Minister Kristin Halvorsen said her country’s fund has a long record of transparency, unlike others.

“We are extremely transparent,” she said. “Our investment guidelines are discussed in parliament each year.”

Halvorsen said the fund was a long-term investor, too.

“We have a very long-term horizon and that is not only to stabilize the Norwegian economy but also to stabilize global economy. We have ethical guidelines, to avoid our investments contribute to unethical acts. We are exercising these guidelines through our ownership rights.”

In the US and elsewhere, the overseas state-run investment funds have avoided more severe forms of regulatory scrutiny in Washington by taking small stakes in US companies, but that’s done little to mollify critics in US congress.

Despite that, the funds have a multitude of defenders who note that the investments in US companies is tantamount to a vote of confidence in the economy.

The flow of funds from overseas could, ideally bolster the US dollar, which fell 11% against the euro in 2007, reaching a high of US$1.4968 in November – and help jittery markets because the funds tend to look at the long-term environment.

Robert Kimmitt, the US Deputy Secretary of the Treasury, said such investment was welcomed.

“At this point, the history with sovereign wealth funds is they are generating higher investment returns without generating political controversy,” he said. “Importantly, both fund management and investment decisions we have seen have been made on commercial not political grounds. We welcome that kind of investment in the United States. We don’t fear such investment.”

But he said that because of the “growth in the size and the number of these funds is such that vigilance is required.”
[Copyright ap 2008]