WASHINGTON—The worldwide recession is taking a toll on investors and investees alike, diminishing the values of companies as well as the pocketbooks of their investors. Sovereign wealth funds (SWF), at one time the knights in shining armor for the financial industry, are also suffering along with the rest of the industry.
SWFs are public investment funds set up by governments of countries with surpluses—such as Singapore, Dubai, and Qatar—to make investments. SWFs were key players at the beginning of the recession, supplying much-needed capital for the U.S. financial industry.
Now, as the assets of SWFs suffer, their investment blunders affect the people of an entire nation, whereas individual investors affect only their own wealth.
SWFs have lost around $67 billion since the beginning of the economic crisis, according to a recent report titled “Sovereign Wealth Fund Investment Behavior” published by the Monitor Company Group L.P.
In the first quarter of 2009, SWF investment activities slowed down. They invested only $6.8 billion, totaling 26 transactions representing a 60 percent decrease in volume and a 20 percent decrease in dollar amount compared to the last quarter of 2008. These figures represent the lowest SWF quarterly investment figures since 2005.
The United Arab Emirate investment funds accounted for 46 percent, or 12 of 26 deals struck by SWFs during the first quarter.
Investment activities by Temasek Holdings of Singapore, generally the most active of SWFs, have come to a halt. Its sister company, the Government of Singapore Investment Corporation (GIC), invested a meager $35.5 million in a total of three deals during the first quarter.
SWFs Come to the Rescue
Since July of 2008 until the beginning of 2009, SWFs typically invested funds in their domestic economies. But if the first quarter of 2009 is an indication, the funds are beginning to invest again in foreign markets, albeit with caution.
“The volatile investment climate has made SWFs more risk averse. Therefore, during Q1 [Quarter one] 2009 they continued to be cautious actors in the global economy, scaling back their acquisitions to reflect their perception of increased market risk,” the Monitor report said.
Some SWFs that are supported by excess oil revenues are finding themselves in a bind, given tumbling oil prices and low interest rates on bonds.
“With the dollar relatively weak and interest rates on treasuries near record lows, U.S. government bonds are not generating the kind of returns you write home about,” Alexander Green, investment director at the Oxford Club, an inclusive club for investors, wrote in a recent Investment U report. “So world governments are slowly moving money into global equity markets. And the sums involved are fairly staggering.”
SWF funds are generally earmarked for emergencies, but lately have been used to prop up national economies as well as distressed Western companies, according to an August State Street Corp. report.
SWFs are “government investment funds,” as defined by the U.S. Department of Treasury and “funded by foreign currency reserves, but managed separately from official currency reserves.” These funds are divided into commodity and non-commodity funds. The first generally comes from taxing commodity exports, such as oil or gas products, and the second are funds set aside from official foreign exchange reserves; the latter amounts to a little over 30 percent of all funds according to market estimates.
The funds are invested in stocks, bonds, and different types of fixed assets. The funds are also used toward a country’s economic and social development, as a political tool, as well as providing a cushion in times of need by future generations.
SWF’s Changing Role
“What a difference a year makes,” State Street experts remarked in the report.
At the beginning of 2008, having gone on major investment sprees since late 2007, SWFs were making a mark on the financial environment. Market experts suggested in 2008 that SWF funds could balloon to $12 trillion and $20 trillion by 2020.
But today, the SWF’s have stepped away from being “long-term investors that remained above the fray of day-to-day events,” State Street suggested.
The funds are faced with steep liquidity problems, as many governments are drawing on the funds to bring their national economies out of the recession. Fund managers are facing censure by their governments for taking unprecedented risks with the country’s reserve money.
SWFs from Russia, Ireland, Kuwait, and Qatar all used the funds to rescue their domestic economies.
“Today, SWFS are under greater scrutiny than ever before, not least by their domestic audiences. In societies previously known for treating those in authority with deference, several funds and their governments have faced acute and even hostile questions about their decisions,” State Street said.
Regulatory Measures
In mid-2008, the International Working Group of Sovereign Wealth Funds (IWG) was formed in Washington D.C. with 23 member countries including the United States, Russia, Korea, Mexico, and Norway. The World Bank, Organization for Economic Co-operation and Development, Oman, Saudi Arabia, and Vietnam were granted permanent observer status.
The IWG was tasked with establishing regulations to govern the behavior of SWFs. Twenty-four “Generally Accepted Principles and Practices for SWFs,” a voluntary framework that sets governance and accountability standards and addresses transparency issues as well as financial and ethical concerns, were rolled out in October 2008.
IWG systemically reviews 41 SWFs and quarterly publishes the Linaburg-Maduell Transparency Index. This index rates the transparency of sovereign wealth funds based on 10 principles. The organization and member country governments use the Index to call governments that have “unethical agendas” to task.
“The funds simply cannot afford to underestimate how important reassurance about systems of transparency and governance is in ensuring that unfounded suspicion doesn’t mushroom into a protectionism that is in nobody’s interest,” said the then EU Trade Commissioner Peter Mandelson at a 2008 Organization for Economic Cooperation and Development conference.
The Kuwait Investment Authority, established in 1953, is considered to be the oldest known SWF. Today, it is worth $203 billion mainly from oil export proceeds. The fund receives 10 percent of the Kuwaiti government’s general revenues annually.
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