Deep Currents

If you’ve been keeping track of the equity markets in the past few years, you’ll be familiar with sovereign wealth funds (known as SWFs and not to be confused with the lonely souls of the personals section) and the question of whether their fealty to blue-blooded bosses means that they should be considered a political risk. They’ve stepped prominently into the limelight during the recent credit crunch by throwing lifelines to Citigroup and other major investment banks. Since the public debate surrounding them appeared uninformed by some of the basic facts, the Monitor Group decided to do some research into the matter and put out a report last week called “Assessing the Risks” that debunked many frequently-stated beliefs. It’s a worthwhile read and conveniently organized with its primary conclusions front and center in case you don’t happen to have the patience to wade through all 92 pages. The conventional wisdom, it says, claims that SWFs are “targeting investments in OECD countries; that they wish to invest in politically sensitive sectors; that they prefer to acquire minority stakes; and that they are moving from conservative to higher-risk investments.” What the report uncovered is the following:

• SWFs invest heavily in domestic and emerging markets.
• Recent SWF investments in U.S. and European financial services firms are atypical and opportunistic, reflecting the credit crunch of 2007-2008.
• SWFs do not appear to be investing for political motives.
• SWFs are willing to take controlling stakes in companies.
• SWFs are taking more financial risk with their investments.
• Each fund has a distinctive investment pattern.
• These funds can be grouped along two dimensions of risk: financial risk and sovereign ownership risk (the risk posed by the sovereign government owner to other nations in which its SWF may invest).
• While helpful along a number of dimensions, increased transparency of SWFs will not mitigate concerns about politically-motivated investing.
• Coordinated, multilateral regulation of SWFs is unlikely.

Written: June 17th, 2008