The Wall Street Journal-20080126-breakingviews-com - Financial Insight- Don-t Fear the Sovereigns- Government-Backed Funds Aren-t All So Worrisome- New Index Ranks Risks
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breakingviews.com / Financial Insight: Don't Fear the Sovereigns; Government-Backed Funds Aren't All So Worrisome; New Index Ranks Risks
Sovereign-wealth funds were hardly talked about 12 months ago. Now, they are one of the hottest topics in global financial markets -- and at the past week's meeting of bigwigs in Davos. In the last year, these state-owned investment entities have spent more than $75 billion snapping up large stakes in some of the world's biggest financial institutions.
Such funds have existed for decades, yet the shift in global economic power and the current weakness in Western markets have given these government investment funds -- forecast to expand assets fivefold to $13.4 trillion by 2017 -- a new significance and raised fears about their motives. Critics such as French President Nicolas Sarkozy and some U.S. politicians worry that these funds tend to be secretive, target political as well as financial returns, and operate at the whim of governments not always sympathetic to Western investor interests.
Yet not all of them are equally troubling. To wit, breakingviews.com has created a Sovereign Wealth Fund Risk index that for the first time ranks 20 of the most prominent funds according to the potential risk they present to Western economic and political interests. (To view the index, go to breakingviews.com/swf.aspx.)
The index scores each fund from one to five on three criteria:
1. Transparency: Who calls the shots at the fund? Does it make investments using clearly identified investment criteria? Or is it subject to political control? Does it publish details of its investments and its track record?
2. Investment Strategy: Has the fund sought control of companies in strategic sectors? Does it buy large stakes in companies, and has it sought to influence decision-making or board representation?
3. Political Threat: How sympathetic is the sponsoring government to Western-style market economies? Will it try to interfere? Is it a long-term stable democracy?
This admittedly subjective exercise throws up some surprising results. China Investment Corp., the $200 billion fund that recently acquired stakes in Morgan Stanley and Blackstone Group, fared worst by these criteria, followed by the Qatar Investment Authority and Venezuela's National Development Corp., largely for their lack of transparency.
A further nine funds posed more medium risks. This group includes Russia's Stabilization Fund, which turns out to be less risky than the Abu Dhabi Investment Authority, or Adia, the flagship fund for a country recently hailed by President Bush as a beacon for the Middle East. That's because the Russian fund only invests in bond markets according to clear criteria, while Adia, which recently took a stake in Citigroup, won't even disclose the size of its fund.
Of course, the index omits several high-profile state-owned entities that have also caused alarm. Gazprom and China Development Bank would no doubt score highly on the index criteria, but are operating companies, not purely investment entities. Also excluded are some Western investment groups with close state links, such as Calpers and Hermes, the U.S. and United Kingdom pension funds -- which are occasionally tarred with the sovereign wealth-fund brush -- since these have clear obligations to their investors.
Nonetheless, the index provides two clear lessons. The first is for politicians: They should acknowledge the bulk of these funds pose little threat to market economies. Eight of the top 20 ranked on a par with many respected private-equity firms and hedge funds, which take controlling interests and are often far from transparent.
The second lesson is for the funds themselves: If they are alarmed at the fear they provoke -- and the risk that politicians might use that as a cover for protectionism -- the solution lies in their own hands. Most sovereign funds could reduce the fear factor simply by improving their transparency.
-- Una Galani and Simon Nixon
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This column is by breakingviews.com, an online financial commentary site.
