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Sovereign wealth funds on the defensive

CBD Singapore
Image caption Singapore is home to some of the largest sovereign wealth funds in Asia

They manage billions of dollars of public money, yet there is little information about how some sovereign wealth funds (SWF) invest.

This week, the largest sovereign wealth funds in the world meet in Beijing, at a time when there are increasing calls for more transparency.

While some wealth funds have transparent structures in place, Norway's Government Pension Fund being an example, in Asia there is still a way to go to meet that degree of transparency, according to Duncan Innes-Ker of the Economist Intelligence Unit.

"In countries like China [and] Singapore there is a need to be more transparent about what they are getting involved in internationally," he says.

In recent years, these government controlled institutions have been under increased scrutiny, both at home and abroad.

Domestically, people want to know how their money is being invested, whereas internationally SWFs face challenges investing in companies that fear their motives may be politically driven.

Accountability

Although each wealth fund is different in terms of investment strategy and the goals set out for it, many are directed towards managing reserves for long-term returns and towards cushioning countries from the volatility of global markets.

In some cases, the SWFs were created to manage the wealth generated from oil and other commodities.

The world's three biggest SWFs are from oil-rich countries, lead by the United Arab Emirates' Abu Dhabi Investment Authority, which has assets valued at $627bn (£386.1bn), according to the Sovereign Wealth Fund institute.

Oil aside, some SWFs, such as the Government of Singapore Investment Corporation (GIC) and China Investment Corporation (CIC), invest wealth from fiscal surpluses or foreign currency reserves.

In the case of GIC, the funds it manages on behalf of the government include money from a pension fund that Singaporeans pay into. However, some of them feel like there is no information given to them about how their money is being invested.

"It's been a long-standing complaint from Singaporeans that there seems to be very little transparency and accountability in regards to how the sovereign funds invest," says Siew Kum Hong, a former nominated member of parliament in Singapore.

The chairman of GIC, Minister Mentor Lee Kuan Yew, said in a recent address: "GIC has preserved and enhanced the purchasing power of Singapore's reserves, outpacing global inflation by a comfortable margin."

Lou Jiwei, chairman of China Investment Corporation (CIC), defended the way funds operate on Wednesday at the meeting in Beijing, saying that the CIC supported greater sovereign wealth fund transparency, but with some caveats.

"It is necessary to recognise that, because of differences between sovereign fund's goals, methods, debt structure and regulatory environment, it is difficult to make horizontal comparisons of the level of transparency," Mr Jiwei said in remarks released by CIC to the Dow Jones news agency.

Politically motivated?

While it is their mandate to make foreign investments, some SWFs face back-lashes in recipient countries because they are government controlled.

"Sovereign wealth funds can have a controversial appearance," says Mr Innes-Ker.

"People tend to view them as governments buying up assets in their countries.

"So there is that question about what their motivations are... particularly when it comes to governments like China, which sometimes seem to have a very obvious international agenda they're advancing."

The controversy centres around whether sovereign wealth funds act purely for commercial gain, or whether political agendas play a part in their investment strategies.

In the US, for example, Chinese state-owned companies have been thought to be investing in American firms to get access to advanced technologies.

The meeting in Beijing of the International Forum of Sovereign Wealth Funds (IFSWF) is aimed at improve the image of wealth funds internationally.

The chairman of the IFSWF, David Murray, says there are a lot of myths surrounding these funds, and that their motivation was, in fact, purely commercial.

"The suspicion that sovereign sponsorship of an investment vehicle means the investment is driven by non-commercial or strategic objectives is both theoretically unsound and practically unsubstantiated," Mr Murray said in a speech on 5 May in London.

In 2008, operating principles were created for wealth funds to assure countries that they would act for economic gain, and not on behalf of their governments.

Titled the Santiago Principles, they are a set of rules that dictate that funds should invest on the basis of financial returns and have transparent structures. However, these rules are voluntary for the members of the forum.

With or without governing rules, clearing their name on the world stage will become increasingly important for SWFs going forward.

Especially for funds such as CIC, which could be receiving large cash injections from the Chinese government, which has about $3tn in foreign currency reserves.

"China's outbound investment is going to be increasing very rapidly over the next decade or so," says Mr Innes-Ker.

"So it really needs to make these efforts to reassure the international community, so that it will have these opportunities for investment."

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