Sovereign funds lay out code of conduct

ABU DHABI // A group representing an estimated $2.3 trillion in sovereign wealth funds yesterday presented a set of voluntary principles to the International Monetary Fund that calls for greater levels of public disclosure to dispel mistrust surrounding such funds as calls grow for them to help rescue global markets. The International Working Group of Sovereign Wealth Funds (IWG) was organised in May amid a backlash against increasingly large and high-profile investments by sovereign funds that critics warned could be used for political ends. At a meeting in Santiago, Chile, in October, the group's members agreed on 24 basic principles to guide investments abroad, including an emphasis on improving transparency. On Saturday, Hamad al Suwaidi, undersecretary of the Abu Dhabi Department of Finance and a director of the Abu Dhabi Investment Authority (Adia), who co-chairs the IWG, handed over those principles to the IMF's policy steering body in Washington DC, at the start of the annual meeting of the IMF and the World Bank. "Through the implementation of the Santiago Principles, we seek to ensure that the international investment environment will remain open and our capital can continue to be put to use when it is most needed," said Mr Suwaidi in a press release. Even as he made the remarks, however, it was clear that the mood toward sovereign funds had undergone an about-turn in the five months since the group first assembled. Before the meeting in Washington yesterday, the IMF and World Bank were calling for co-ordinated action on the global financial crisis, with Dominique Strauss-Kahn, the head of the IMF, warning that the world was on the "cusp of a global recession". Some of the world's largest banks have collapsed in the past month amid $600 billion in losses on asset-backed securities, sparking a crisis that has wiped $5 trillion from global equity markets in the past week alone. While officials and politicians in the West once worried that sovereign funds may be investing too much in their economies, more now appear concerned that sovereign funds might not be investing enough. At the same time, critics in Asia and the Middle East are calling for sovereign funds to keep more of their money closer to home. "This time around, they will have no option but to put money into local markets," said Khalid Abdulla-Janahi, the chairman of Bahrain's Ithmaar Bank. "It's political suicide if they don't." What has not changed is the recognition that sovereign wealth funds now play a vital role in global capital markets. Although many have been in existence for decades, the funds gained new prominence after China's emergence into the global economy sparked a boom in exports of manufactured goods and the raw materials needed to make them. Big exporting nations in developing economies channelled their savings into sovereign funds, which together with central bank reserves have become critical sources of demand for US government and corporate debt. But it was their investments last year in the stock of the world's biggest banks that sparked a wave of unfavourable scrutiny. Singapore's $9.8bn investment in the Swiss bank UBS and Adia's $7.5bn investment in Citigroup were part of a wave of high-profile investments designed to shore up the banks as the subprime mortgage crisis first unfolded. Those investments have since proved costly. Citigroup's share price has dropped roughly 56 per cent since Adia's investment. China's chat groups are filled with scorn for the China Investment Corporation's purchase of a 9.9 per cent stake in the private equity firm Blackstone, which has since seen its shares fall almost 75 per cent in value. Nonetheless, the backlash against sovereign investments prompted the US to beef up the authority of its Committee on Foreign Investment. More recently, Germany's government approved legislation that would give it greater authority to block foreign investments. With pressure growing from Washington and Brussels, Abu Dhabi launched an effort to head off a protectionist backlash that stood to restrict the flow of sovereign assets back out into the global economy. In March, the Abu Dhabi Government's director of international affairs at the time, Yousef al Otaiba, wrote an open letter to US and other western financial officials saying that Abu Dhabi's funds only invested to secure future benefits for its own citizens and those of the UAE. "It is important to be absolutely clear that the Abu Dhabi Government has never, and will never, use its investment organisations or individual investments as a foreign policy tool," he said. In May, Adia and the IMF established the IWG. The group comprises countries with a wide range of sovereign funds, from giants such as Adia to tiny East Timor. (The IWG member countries are: Australia, Azerbaijan, Bahrain, Botswana, Canada, Chile, China, Equatorial Guinea, Iran, Ireland, South Korea, Kuwait, Libya, Mexico, New Zealand, Norway, Qatar, Russia, Singapore, East Timor, Trinidad & Tobago, the UAE and the US. Oman, Saudi Arabia, Vietnam, the Organisation for Economic Co-operation and Development and the World Bank participate as permanent observers.) Since then, the absence of any new high-profile purchases by sovereign funds into western banks has sparked a new type of concern: that savings-rich countries and their sovereign wealth funds may be sitting on the sidelines as the western financial system melts down. But analysts say developing nations are still net buyers of US assets. According to Brad Setser, an economist at the Council on Foreign Relations in New York, foreign central banks have bought $100bn in US Treasury bonds since Sept 10. Like other private investors, however, sovereign funds and central banks appear to be selling securities considered riskier - including stocks and short-term bonds - and instead moving into longer-term government bonds and cash. Sovereign funds are not inactive on the equity front, either. Last week, Mubadala Development, with an estimated $10bn in assets under management, agreed to pay $314 million to more than double its stake in AMD, the US chip company. A Mubadala affiliate, Advanced Technology Investment, will in turn pay $2.1bn to take over AMD's chip manufacturing business, and assume $1.2bn in AMD's debt. In establishing the voluntary principles, the IWG had to overcome objections by some members that adopting principles would somehow validate concerns about their activities. Some funds were also loathe to adopt any practices that would put them at a disadvantage relative to other investors, particularly as this related to the confidentiality of their investment activities. After marathon negotiations in Santiago, however, the group recognised the need for greater transparency about their activities. The principles presented to the IMF, and published on the Group's website, make repeated mention of the need for greater transparency. To that end, the group earlier this month published a survey of member practices. And several funds have managed to crack open their doors to the public, if only slightly. Adia launched a new, more informative website in June, a step followed recently by the China Investment Corporation. The Government of Singapore Investment Corporation last month published its first annual report, following in the footsteps of its sister fund, Temasek Holdings, which began publishing annual reports in 2004. The full list of principles, which can be found at www.iwg-swf.org/pubs/gapplist.htm, include recommendations that sovereign funds coordinate their activities with their respective governments and central banks to avoid interfering with domestic economic policy. Funds should disclose their sources of funding and the conditions under which their owners can withdraw them. Sovereign funds managers should be independent of their owners but fully accountable, publishing annual reports and undergoing annual audits. Addressing criticism among some economists that the funds' secrecy contributes to volatility in capital markets, the principles call for funds to disclose "relevant financial information" to "contribute to stability in international financial markets and enhance trust in recipient countries." Each funds' investment policies should be made public, including the extent to which they employ outside managers. The principles also address concerns about conflicts of interest arising between the funds' and their government owners, calling for funds to avoid taking advantage of privileged information or influence when investing. But the principles stop short of making an explicit pledge not to invest for political ends. The principles include a call for funds to abide by local rules and regulations and base their investments on financial and economic grounds. It even calls on funds to disclose any investment decisions "subject to other than economic and financial considerations." The IWG plans to establish a standing committee of 10 of its members to explore setting up a permanent body to oversee compliance of the principles. Fund members are now waiting for a quid pro quo: the OECD is overseeing an effort analogous to that of the IWG among nations that receive sovereign investment. Its aim is to produce a pledge not to subject sovereign funds to discriminatory restrictions. Additional reporting by Bill Spindle. warnold@thenational.ae