Wealth funds to discuss 'code of ethics'

(Getty Images)

Sovereign wealth funds that control an estimated $3 trillion in assets will meet in Singapore this week to discuss a code of ethics aimed at allaying Western fears that their investments are politically motivated.

The International Monetary Fund's international working group of sovereign wealth funds (SWFs) will gather on July 9-10 to thrash out voluntary guidelines that the IMF hopes will be finalised by October this year.

Highly-secretive wealth funds, investment funds owned by national governments, have become increasingly active in buying Western assets in the past year, often armed with cash piles from soaring oil prices and trade.

Several have participated in multi-billion-dollar capital infusions into banks such as Citigroup and UBS, which were reeling from losses from the collapse of the US subprime mortgage market.

Goldman Sachs estimates US and European banks may need a further capital infusion of more than $200 billion. Analysts say banks have already written off $400 billion in bad investments.

But the funds' growing clout has fuelled political concerns about foreign influence over domestic assets. That could spur protectionism, chilling the climate for foreign investment in the West even as the global economy slows, analysts say.

"It's important to establish some guiding principles. This will help contain the risk of a backlash in the West and also establish some kind of trust between investor and investee," said Chua Hak Bin, chief Asian strategist for Deutsche Bank Private Wealth Management in Singapore.

Analysts do not expect a breakthrough at the meeting in Singapore, which has already agreed with Abu Dhabi and the United States to a voluntary set of principles.

US Deputy Treasury Secretary Robert Kimmitt earlier this year described wealth funds as a force for good, but said their rapid growth warranted a vigilant stance by the US government to ensure they remain "a positive influence".

Australia said last week it will closely examine Chinese bids for Australian miners, while Germany has expressed worries foreign governments may gain access to German technology and it is pushing for European Union-wide laws to regulate SWFs.

"The need for capital in the West is far greater than the urge for SWFs to invest their surplus funds. Therefore, 'rescue efforts' will not be affected, but other non-pressing investment talks will," said Sherman Chan, an economist at Moody's Economy.com in Sydney.

Wealth funds' disclosure standards vary widely.

Oil-rich Norway's Government Pension Fund publishes its portfolio holdings annually, but others such as the Abu Dhabi Investment Authority, the world's largest, and the Government of Singapore Investment Corp (GIC) refuse to even reveal the assets they manage.

"They probably don't want to have their performance evaluated," Moody's Chan said.

Chan said most wealth funds did not appear to have any political agenda. They are believed to always buy non-controlling stakes.

On the other hand, many wealth funds say they are being unfairly singled out, noting Western governments have not demanded the same transparency from private equity firms or hedge funds that control equally large sums of money.

"In terms of disclosure practices, investment approach and market behavior, SWFs are more in line with best practices than political rhetoric suggests," JPMorgan economists David Fernandez and Bernhard Eschweiler wrote in a recent report.

One newcomer, China Investment Corp, said it may turn its back on countries that give wealth funds too rough a ride.

"If there is too much political pressure and too much unpredictability, you just go away," CIC President Gao Xiqing told a mergers and acquisitions conference this month.

"Fortunately, there are more than 200 countries in the world. And fortunately, there are many countries who are happy with us."

CIC was set up last September to earn higher returns on China's reserves, but had in May already taken a $3 billion stake in US private equity firm Blackstone Group.

In Asia, media reports have highlighted growing concerns that state-managed funds have wasted billions of dollars propping up Western lenders as stock markets slide.

For example, Merrill Lynch shares have dropped to around $30 from the $48 per share paid by Singapore's Temasek Holdings when it injected $5 billion into the US bank.

Manu Bhaskaran, partner at Singapore-based consultancy Centennial Asia Advisors, said any code of ethics "should take into account the legitimate interests of the citizens of the country the SWF originates from, the financial markets they operate in, and other stakeholders."

"There certainly should not be a repeat of the CNOOC or Dubai Ports fiascos where politically orchestrated hysteria blocked a commercially sensible deal," he added.

Dubai Ports bought British firm P&O in 2005 in a deal that saw it gain control of 22 American ports. The US Congress blocked the deal and Dubai was eventually forced to sell P&O's US operations to a unit of American International Group.

CNOOC, China's top offshore oil and gas producer, ran into political obstacles in 2005 when it bid for US firm Unocal. (Reuters)

Print | Email | Discuss this article |

USER COMMENTS (0 COMMENTS)

POST A COMMENT

CLICK HERE TO POST A COMMENT

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Security Code *
Please click post only once - your comment will not be published immediately.