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Sovereign Wealth Funds Come Out of the Shadows

Western politicians and regulators call for greater transparency among sovereign wealth funds.

In April, when representatives gathered for a conference of the International Working Group of Sovereign Wealth Funds in Kuwait, Bader al-Saad, managing director of the Kuwait Investment Authority, spoke of the horrors of government intervention in the wake of the financial crisis. “We will see more nationalizations and greater protectionism,” he said. “Overregulation will lead to deficiencies in the markets. We hope this will be temporary.”

Just two years ago it was Western politicians and regulators who were raising the red flag about sovereign wealth funds. At that time the fear was that giant funds backed by secretive governments in Asia and the Middle East could seize strategic industries, undermine the U.S. currency or distort markets.

Lawrence Summers, director of the White House’s National Economic Council and a key adviser to President Barack Obama, told the World Economic Forum in Davos, Switzerland, in January 2008 that sovereign wealth fund investments raised “profound questions” about geopolitical power. At about the same time, the California State Assembly took up legislation that would have stopped that state’s two largest public pension funds, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, from investing with any asset managers whose clients included investment funds based in countries with troubling human rights records. It was a bill aimed squarely at two private equity firms, New York–based Apollo Management, which is 9.9 percent owned by the Abu Dhabi Investment Authority, and Washington-based Carlyle Group, which is 7.5 percent owned by Mubadala Development Co., a smaller fund in Abu Dhabi.

The bill died in session, but the message was heard: Political opposition had become a tangible threat to sovereign funds.

It was largely Western fears that led to the formation of the IWG, whose genesis can be traced to an October 2007 meeting that brought leading sovereign wealth funds together at the behest of the International Monetary Fund and the U.S. Treasury Department to talk about forming a code of conduct. Although some sovereign funds feel that the effort is hypocritical, given the role of Western financial deregulation in fanning the flames of the credit crisis, 26 countries with sovereign funds formalized the IWG in April 2008 and, at a meeting in Santiago, Chile, the following September, drafted guidelines known as the Generally Accepted Principles and Practices, or, simply, the Santiago Principles. At the April follow-up meeting in Kuwait, the IWG created a voluntary forum that will meet at least once a year to exchange views and facilitate an understanding of the Santiago Principles and SWF activities.

These principles are not overly demanding — nor are they mandatory. Among the recommendations: Sovereign wealth funds should produce annual reports, disclose their relationships with other state bodies and their policy purposes and adopt investment policies based on sound portfolio management principles. The guidelines do not require or even encourage funds to disclose their assets under management or their investment holdings.

Andrew Rozanov, head of sovereign advisory at State Street Global Markets, calls the Santiago Principles “more political than economic in nature.” Still, he notes, the willingness of sovereign wealth funds to adopt guidelines of any sort shows “they realize that it’s better to get ahead of the curve.”

See related article, "Sovereign Wealth Funds Embrace Hedge Funds".

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