Gulf SWF transparency scores stagnate in Q1

Only one of the oil-rich Gulf nations' 11 sovereign wealth funds has improved its transparency score in the first quarter of this year compared to the previous quarter based on the Linaburg-Maduell Transparency Index developed by the US-based Sovereign Wealth Fund Institute.

The transparency index rates SWF transparency using 10 principles including the provision of information related to ownership percentage, portfolio market value, returns, ethical standards, investment policies and objectives.

Saudi Arabia's Sama Foreign Holdings, the fund operated by the kingdom's central bank with assets worth $431 billion (Dh1.58 trillion), improved its transparency score from two in Q4-2008 to three in Q1-2009, but is still far below the highest score of 10, the institute said yesterday.

Five international SWFs have scored a perfect 10 – Singapore's Temasek, Ireland's National Pensions Reserve Fund, Alaska Permanent Fund, Norway's Government Pension Fund and New Zealand Superannuation Fund.

Critics of the investment style of sovereign funds have often called for greater transparency from such funds, which they suspect may be driven by political rather than economic interests in their investment decisions. The Santiago Principles, a common set of voluntary principles and practices for SWF operations and disclosure, was created in October under the aegis of the International Monetary Fund.

At the end of 2008, two Gulf funds saw improvements in their transparency ratings over the previous quarter. Bahrain's Mumtalakat moved from six to seven and the Emirates Investment Authority stepped up from one to two.

The best performers from the GCC at the end of Q1-2009 are Mumtalakat and the UAE's Mubadala, both with a rating of seven. The Kuwait Investment Authority has consistently scored a six on the index for the past four quarters till Q1-2009, while the Qatar Investment Authority has been at five for the same period.

SWFs have been implementing several initiatives to improve transparency levels. Mubadala, for instance, has sought and received a long-term credit rating from the three global credit rating agencies – Moody's Investors Service, Fitch Ratings and Standard & Poor's. Aggregate assets under management by SWFs hit $3.22trn in the first quarter, a growth of six per cent from a year ago and 59 per cent from the 2007 figure of $2.02trn, the April data showed.

SWFs have not escaped the effects of the global downturn, and some have seen their total assets fall considerably as a result of the drop in value of their investments. However, the past 12 months have seen a number of new entities emerging and the collective might of SWFs has not diminished as a result of the economic slowdown, research and consultancy firmPreqin said in a report.

This growth is primarily due to the reclassification of China's $347bn State Administration of Foreign Exchange Investment Company as an SWF following its purchase of a number of public and private equity interests in 2008.

Kazakhstan has also set up a new fund – the $38bn Samruk Kazyna National Welfare Fund – over the course of 2008, while Korea is one of the existing funds that has boosted the assets of its SWF over the past year.

These funds have counteracted the effects of declining total assets of some SWFs that have suffered as a result of poor investment returns in the wake of the global economic downturn.

Unlike other institutional investors such as pension plans, many sovereign wealth funds do not have future liabilities that they are obligated to pay out on, and do not have external investors able to withdraw capital at short notice.

As a result, they have long-term investment horizons, and often are relatively free to invest in risky alternative investment types.

The SWF Institute recently disclosed that Abu Dhabi Investment Authority (Adia) continues to be the sovereign fund with by far the largest assets. Adia's estimated assets of $627bn are more than 45 per cent higher than the number two, Saudi Arabia's Sama Foreign Holdings, which clocks in at $431bn.

Adia's holdings span multiple sectors and include a 16 per cent share in the United Kingdom-based Eastern European Trust, 9.8 per cent in Bermuda-registered Macquarie International Infrastructure Fund (both holdings through subsidiary Abu Dhabi Investment Company), 8.3 per cent in Egypt-based Hermes Holding, and 4.9 per cent in United States-based Citigroup.

About 44 per cent of the world's SWFs are based in the Middle East, followed by 35 per cent in Asia and 17 per cent in Europe.

Among the Asian funds, the largest is China's Safe Investment Company, with assets of $347.1bn. This places the fund third in the international ranking.

Keep up with the latest business news from the region with the daily Emirates Business 24|7 newsletter. To subscribe to the newsletter, please click here.