Strategy

Sovereign wealth funds: Paper tigers make nice

The bogeymen of capitalism get a new code.

Sovereign wealth funds are the bogeymen of capitalism: they inspire widespread fear, despite no evidence of harmful activity. “They are an inevitable and rational consequence of some of the most powerful structural trends in the global economy,” as Morgan Stanley analyst Stephen Jen puts it. Yet an international working group of 26 state-owned funds agreed in early September to submit to a voluntary code of conduct, which it will present to the International Monetary Fund’s policy-setting committee on Oct. 11. Canada is among the countries represented, along with Singapore, Qatar and Norway, home to three of the more established SWFs.

Why is this gesture necessary? SWFs give some politicians — like French president Nicolas Sarkozy and any number of U.S. congressmen — the willies. They are set up by petroleum-producing or otherwise flush countries to diversify assets abroad. They are opaque, some are based in states with murky politics, and they like to buy and develop long-term assets, such as ports and roads, which could have strategic importance in a conflict. Many also benefit from high oil prices that suck dollars out of western countries. Yet the fact is, SWFs have historically acted like rational long-term investors with strictly economic agendas. This distinguishes them from, say, many U.S. pension funds, which have voted their shares to further political objectives. And SWFs are no less transparent than hedge or private pension funds.

So the IMF move is merely a polite attempt to ward off any further interventionist blockades. If the SWFs’ effort wins some goodwill, that’s fine, but “the issue won’t be settled” with this move, Jen tells Canadian Business. If anything, a greater dedication by the world’s governments to establishing “uniformity of treatment” for all investors is essential to ensure capital continues to flow freely internationally. Picking on SWFs, he says, only “exposes a flaw in our cross-border investment flow regulatory environment.”