Risks from sovereign fund investments

Risks from sovereign fund investments
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First Published: Sun, Jan 27 2008. 12 30 PM IST
Updated: Mon, Jan 28 2008. 05 49 PM IST
Sovereign wealth funds (SWFs) were hardly talked about a year ago. Now they are one of the hottest topics in global financial markets. Over the last year, these state-owned entities have spent more than $75 billion (Rs2.95 trillion) snapping up stakes in some of the world’s biggest banks, taken big positions in stock exchanges on both sides of the Atlantic and even attempted a takeover of one of Britain’s leading supermarkets.
Such funds have existed for decades, but the shift in global economic power and the current weakness in Western markets have given SWFs new influence and raised new fears about their motives.
Measuring risk
Of course, not all SWFs are equally troubling. Breakingviews.com has created the BV SWF Risk Index that, for the first time, ranks the top 20 prominent funds according to the potential risk they present to Western interests. The index scores each fund from one to five on three criteria:
1. Transparency: Who calls the shots at the fund? Does the fund make investments using clearly identified criteria? Does it publish details of its investments and its track record?
2. Strategic control: Has it sought control of companies in strategic—that is, defence-related—or semi-strategic—such as banks and utilities—sectors? Has it tried to influence decision-making, either by buying a large stake or via board representation?
3. Political threat: How sympathetic is the sponsoring government to Western economic and political interests? Is it a stable, preferably democratic regime?
What it all means
The index throws up some surprising results. China Investment Corp., the giant $200 billion fund that recently acquired stakes in Morgan Stanley and Blackstone Group LP is top with 11 points. Anything in double digits is considered a high potential risk to Western investor interests. But only two other funds are placed in this category: The Qatar Investment Authority and Venezuela’s National Development Corp.
A further nine funds scored between seven and nine on the BV index, which makes them medium risk. This group includes Russia’s Stabilisation Fund, which turns out to be less risky than the Abu Dhabi Investment Authority (Adia). That’s because the Russian fund only buys bonds according to clear criteria, while Adia won’t even confirm the size of its fund.
The index points to two clear lessons. The first is for Western politicians: They should acknowledge the bulk of SWFs pose little threat to Western interests. Eight of the top 20 SWFs score six points or less. That ranks them on a par with many respected US and European private equity firms and hedge funds. The second lesson is for SWFs themselves: If they are alarmed at their high ranking, the solution lies in their hands. Most SWFs could reduce their score simply by improving their transparency. They should do so before the index is next updated.
Part-II of this special Breaking Views column tomorrow will look at 20 funds in the index.
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First Published: Sun, Jan 27 2008. 12 30 PM IST