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Sovereign health

Tuesday 13 July 2010 - by Andrew Hickley

The rapid growth in sovereign wealth funds and issues around transparency have sparked off fears over the safety of investing in the funds but is there any foundation to these fears? Andrew Hickley investigates

The criticisms levelled against sovereign wealth funds in the past have been numerous and include concerns over national security, lack of transparency of the funds and the rapid growth in both size and importance of the asset pool.

The funds, generally created by countries with large excesses of capital that are not required for domestic purposes, are primarily long-term investments.
Ohio State University Moritz College of Law assistant Professor Paul Rose, who has testified in front of the US Senate on the matter of SWFs, says that they have a, perhaps unfounded, reputation for creating trouble.

Rose says: “Before the financial crisis, I wouldn’t use the word fear to describe SWFs, but concern. People saw sovereign wealth funds investing and thought there might be a political motive, there was certainly a lot of suspicion.”

Rose says this fear was still there even when the investing fund appeared to do everything that businesses wanted.

“For the businesses, I actually think they’re not as concerned as the governments are. I think they see sovereign wealth funds as the SWFs want to represent themselves: full of patient capital, being long-term investors that are probably going to be around for a while, they are not going to agitate the way that other large institutional investors might. If they do have a concern though the concern might be that they are going to try and pressure them, they are going to try to get them to do things for political purposes.

“For example they could be a Canadian mining company and they could pressure the mining company to open up a series of mines in, for example, China. It might not be in the company’s best interests to do this, but it is in China’s best interest to create relationships with these resource firms in order to make sure that they might have a smoother flow of resources. Up to now though I think the SWFs have been pretty careful not to do that.”

A group of SWFs have formed the International Forum of Sovereign Wealth Funds, of which 19 of the biggest 25 SWFs are members. In 2008, the IFSWF agreed on increasing transparency measures with the creation of generally accepted practices and principles, known as the Santiago Principles.

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