Concern over SWFs overblown, says study

Sovereign wealth funds have invested $92 billion in publicly disclosed equity transactions in 2007. (AP)

Heightened national security concerns over strategic investing by sovereign wealth funds (SWFs) appear to be overblown, a new study released yesterday found.

The study, conducted by consulting firm Monitor Group, found the bulk of SWF investing appears to be aimed at furthering the economic development of a host or allied country, not acquiring sensitive strategic or economic assets to advance political aims of a state.

The Monitor Group report comes amid rising national concerns over the growing economic power of SWFs, which are estimated to control up to $3 trillion (Dh11trn), fuelled by growing trade imbalances with Western trading partners.

Such funds are wielding growing investment clout, having invested $92 billion in publicly disclosed equity transactions in 2007, compared to $3bn in 2000, Monitor found. The moves have raised concern that some funds may be tools of state governments to acquire strategic foreign assets to advance political aims.

The study, which examined some 1,100 publicly disclosed equity SWF transactions worth an estimated $250bn between 1975 and 2008, said it is "too early to say whether SWFs constitute a threat to the existing world order".

But it concluded that most SWFs "appear to be purely financial investors", although a few, such as those based in Singapore and the UAE, "have pursued transactions to accelerate economic development in their home countries".

"The public dialogue on this subject has been very long on concern based on speculation, but relatively short on facts," said William Miracky, a Monitor Group senior partner. "Our sense is the talk and concern about what they might do is overblown."

The study comes as US and European banks in particular have sought and received billions of dollars in SWF investment to prop up balance sheets hammered by investments tied to sub-prime mortgage losses.

The Monitor Group study concluded that these recent bank transactions appear to be "atypical and opportunistic", and not part of a broad move to exert influence and control over the global banking system.

"Rather than posing a potential threat to national security, SWFs avoid sensitive sectors and industries," the study found. It found that more than half of all investment is in domestic or emerging markets.

But the study found that SWFs appear to be moving towards "higher risk investments" by shifting more assets into illiquid assets such as buyout firms and real estate from traditional conservative investments like government bonds and other liquid securities.

The study cautioned that it examined only a small portion of SWF investing, since most is unreported. "Our data likely represent the tip of the iceberg," it said. "That said, we can only comment on what we see, and what we see challenges some widespread beliefs about SWFs."

In a newspaper article yesterday, Peter Mandelson, the European Union's Trade Commissioner, suggested that SWFs should establish a code of conduct to alleviate concerns that their investment could be used for political leverage. "The possibility that a state might seek to use its investment for political leverage is very slim, but because recipients are not quite sure of the rules of the game, they can't exclude it entirely," Mandelson wrote in the Wall Street Journal.

"The smart move from the funds would be to confound the suspicions," he said, pointing to the example of hedge funds and private equity funds which have created voluntary codes of conduct to reassure the public of their intentions. (Reuters)