Research Roundup: Sovereign Wealth Funds
When the topic of sovereign wealth funds comes up in a Presidential candidate debate, it is time to take notice.
Even the question by NBC’s Brian Williams – suggesting that SWF investments in the likes of Citigroup and Merrill Lynch strike the American public as “just plain wrong” reveals how the topic has become a hot potato.
Reuters reports that business and political leaders will be queuing up to talk to sovereign wealth investors at the World Economic Forum in Davos “as debate rages over whether these cash-rich funds are the saviours of global finance or a threat to economic stability.”
In a briefing, The Economist provides a good rundown of the issues. In keeping with its free-trade, free-market philosophy, the magazine warns against financial protectionism.
A broad, politicised hostility to foreign direct investment would come at a high cost. Such investment spreads financial capital, know-how and technology. It helps the world economy adjust to imbalances and gives countries stakes in each other’s prosperity.
Writing for New York Times Dealbook, Andrew Ross Sorkin sounds a more cautionary note. He quotes legendary financier Felix Rohatyn as saying what the SWFs really want is influence on the world stage, despite their insistence otherwise.
He’s right, argues Sorkin:
While government-controlled funds swear up and down that their investments are purely financially motivated, they just can’t be.
Commenting on why value investors such as Warren Buffet are not snapping up weakened US banks, Rohatyn says: “The big difference is the political element. Buffett is seeking the best return when he invests; that’s his only goal. For Dubai and China, whether the investment returns 10 percent or 20 percent - or perhaps much less - is almost beside the point.”
“They are making investments that they probably think are O.K. but not spectacular,” Rohatyn said of government-controlled funds. For them, he contends, “there has to be a political objective over and above the rate of return.
This is not a rallying cry for the United States to put up a protectionist fire wall around itself, Sorkin writes. “That’s not the right answer. But we do need to at least recognize what these investments mean for the future. ”
One influential adviser has added his voice to calls for more oversight. Mervyn Davies, chairman of Standard Chartered bank and a leading business adviser to Gordon Brown, the UK prime minister, said SWFs based in the Middle East and Asia should agree to adopt minimum standards on transparency and governance.
“Because sovereign wealth funds have become such important players, they have to behave impeccably,” he told the Financial Times. “Otherwise they’re irresponsible participants in the world economy.”
Davies’ comments are significant because Temasek, the Singapore-based investor that is one of the world’s largest sovereign investors, has an 18% stake in StanChart.
One useful resource in tracking SWF developments is Excessliquidity.org, a generally “pro-SWF” blog. At a basic level, the US Treasury provides a clear yet thorough description of SWFs and how they work.
A consensus seems to emerging that, at a minimum, increased transparency and disclosure is required. The question becomes how this can be enforced. A previous Research Recap post, Sovereign Wealth Funds Emerging as Major Force, addressed this and other aspects.
Brad Setser‘s blog on RGE Monitor notes that SWF’s have become part of the cultural zeitgeist as evidenced by Maureen Dowd’s column in the New York Times skewering the Gulf’s purchases of US banks. A broader New York Times story looks at foreign acquisitions of US companies, including by SWFs.
Setser notes that the Times story says that a lot of the 2007 inflows came from Europe and Canada, not Asia or the Gulf.
“For the first time since 2000, foreign acquisitions will top US acquisitions abroad, generating around $100b in net inflows. That is not enough to finance a $750b deficit, but every little bit helps.”
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