More Transparency for Sovereign Funds?
Tony Tan of GIC announced that Singapore would increase transparency of its sovereign funds – as part of broader discussions on a code of conduct by sovereign funds. Was Singapore listening to Larry Summers? Last Thursday in a much written about panel on sovereign wealth funds he stated (I paraphrase) that he was baffled by the reluctance of sovereign funds to get in a room and agree to a basic code of conduct that would deflect some of the concerns about sovereign funds.
This is also the big lesson that Breaking views draws in its new risk index for sovereign funds. They note that most sovereign funds do not “pose risks to western interests’. Furthermore even those that potentially do because of their penchant for controlling stakes in companies and uncertainty about governance structures shouldn’t be penalized they say because they don’t necessarily pose any threats. Purchases should be treated on a case by case basis. Thus they suggest calmness. But if sovereign funds want to defuse the concerns, they could always be more transparent about purchases, intentions, governance and risk control.
The index – and recommendations is also pretty similar to the conclusions of a paper and congressional testimony by Ted Truman of the Peterson Institute from last fall.
Tan’s statements are actually almost identical to those made on December 10, around the time of GIC’s first foray into the bank recapitalization pool for UBS., At that point he suggested that there was a case for further disclosure from Sovereign funds including their links with sponsoring governments, their investment strategies, their internal risk control and related areas. He warned at that point against the financial protectionism of those receiving funds and suggested that any new rules should ensure that all financial investors are treated equally.
Several trends likely influenced Singapore’s decision
1) the writing is clearly on the wall – the US treasury has increased shuttle diplomacy on the issue, several European countries are also concerned. Both the IMF and OECD are developing guidelines with stakeholders . Temasek has also faced some issues in south East Asian countries. While beggars may not be choosers – or rather the need for sovereign funds capital may limit leverage, pressure is on. And agreeing to some code may be the only way to remove concerns.
2) more transparency might defuse some concern from the likes of UBS stakeholders who are not too happy about the terms granted to GIC and the still unknown middle eastern fund which took a smaller stake. They wonder why existing shareholders were not given the opportunity to up their shares under the preferential terms.
3) Lastly but most importantly, domestic pressure may also be a factor. Some of those in Singapore are less sold on using $16 billion of Singapore’s reserves to support foreign financial institutions that may continue to falter. Concerns about the wisdom of the purchases were raised in Singapore’s parliament last week.
Via Channel news Asia Tan also notes that GIC has a responsibility to the government and people of Singapore to make sure funds are managed for the good of the citizens.
He said “it’s not our job to try to be a white knight to save the world’s economic system. That’s the job of the IMF.”
He suggested that Singapore would make more details, governance and investment motivations public by the second quarter.
Finally, Singapore may be hoping to continue to provide a model for sovereign funds.
Will other funds follow? Some sovereign investors are publicly quite concerned about US protectionism. So it may be in the interest of sovereign funds to set certain parameters – to deflate the frenzy and concerns. Though some of the baffled responses of sovereign investors such as those expressed by Chinese and GCC officials may hint that they are worried that more restrictions might follow. Saudi Arabia’s Muhammed Al-Jasser noted the difficulty of trying to pre-emptively regulate this area – noting that sovereign funds followed the rules of any exchange. Bader Al Sa’ad of Kuwait repeated his previous query – does transparency mean disclosing purchases before they are made?
So what do people mean by transparency?
- Some disclosure of investment goals
- Overarching asset allocation – and perhaps signal of a massive strategy shift. But not necessarily detailed holding information. Not all funds will likely be as open as Norway.
-Some information on risk control, governance and domestic oversight.
There are a related set of governance issues which involve understanding who is actually making the decisions, whether it be asset managers or political leaders. How does the oversight and risk control process work? How insulated are managers =from political pressure, including the pressure from foreign governments not to sell a failing stock? Are there implicit quid pro quos.
It may be that none of the prevailing concerns are justified. After all key officials have reiterated that they find little or nothing objectionable in past investments. But the concerns remain and the lack of transparency and the sheer reluctance to disclose more does raise concerns. Yet sovereign funds may wish to disclose information on their own terms. and the shifts of saving and spending mean that it would likely be a voluntary process. imposing rules would not seem to be viable
By the nature of their investments, we may actually know more about the actual holdings if not the general strategy of the likes of Istithmar and QIA than we do about the KIA. Since they tend to take larger stakes, perhaps above disclosure requirements and because some are part of high profile acquisitions, more information is available. However this information is by nature retroactive not forward-looking. And little is known about risk controls, leverage ratios and governance structures.
Other suggestions are emerging to counter or complement the IMF/WB and OECD efforts. Mattoo and Subramanian suggest adding sovereign investments (and currency valuation) to the WTO trade agenda as a way to reinvigorate the Doha round. but although these issues may be somewhat trade-related, some links seem tangential, very politicized. And would it really be easier to reach a consensus in the large multilateral forum than in bilateral or small multilateral groups? some countries (Russia) with sovereign funds and key state owned enterprises are not yet members of the WTO.
One other possible outcome – especially from the OECD discussions – more scrutiny on other investors be they public or private. Mervyn Davies recent statement that sovereign funds should be make more disclosures and have ‘impeccable’ behaviour so as not to be perceived as irresponsible market actors extends also to other, private capital sources. Since sovereign funds are not acting in the market alone.
Links between sovereign wealth funds, so-called sovereign pension funds and other institutional investors may deepen even though pension funds like the CPP have resisted the sovereign wealth fund tag. Just as sovereign funds have entrusted funds to professional asset manager
s including alternatives funds and coinvested with them. more tieups between different institutional investors are likely.
Interestingly, the New Jersey Investment division which teamed with KIA, GIC, Prince Alwaleed and others in the second Citi injection, is looking for more such opportunities. They suggest that institutional investors might team up to seek good investments and presumably secure the good terms that recent recaps have achieved.
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