The sovereign funds’ dilemma

By Ian Fraser in Doha (Originally published on Qfinance blog, Oct 1st, 2009)

Big loser: Sheikh Khalifa bin Zayed Al Nehayan of Abu Dhabi Investment Authority

Transparency has turned out to be something of a doubled-edged sword for the world’s $3 trillion sovereign wealth sector. Analysts suggest that sovereign wealth funds, which last year decided to embrace transparency, are now paying the price for being open and honest about their investment performance.

Vociferous public disapproval of the losses they have incurred by investing in Western banks just as the credit crisis started to unfold is forcing them to rethink their investment strategies.

A group of 22 sovereign wealth funds—including those of Abu Dhabi, Kuwait, and Qatar—last October signed up to the Santiago Principles in a bid to discard their image for secretiveness and embrace transparency. The principles include a requirement to release details of performance and strategies.

This move to open their books, to be ratified by an international working group of SWFs at a meeting at Baku, Azerbaijan next week, followed accusations the funds were being used for political rather than commercial ends. These concerns reached a crescendo on America’s Eastern seaboard during Dubai Ports’s takeover of British shipping and ports company P&O.

However, the funds are now discovering that transparency has a downside. Basically it has obliged them to own up to the massive losses they incurred by investing in Western banks as the banking and financial crisis unfolded during 2007 and 2008.

In the past two weeks, the funds, through the prism of UNCTAD, the United Nations Conference on Trade and Development, have admitted to massive losses, the greatest of which was the $183 billion reportedly lost by the Abu Dhabi investment fund between 2007 and 2008. The massive losses on ill-timed forays into the Western banking sector have given rise to some trenchant criticism back home.

Some analysts suggest the funds have been so chastened by the chorus of disapproval that they will now pull in their horns, eschewing international investment in favor of investing closer to home. Instead of pursuing illiquid but high-yield assets they will focus on safer but lower yielding bonds and indigenous infrastructure investment. Analysts believe it is wrong that SWFs should have to succumb to public pressure in this way.

However, the Qatar fund is still actively pursuing opportunities abroad and, having already invested €7 billion in a 10% stake in Volkswagen, is seeking to raise its stake as high as 20% following the group’s merger with Porsche. “If they give me the opportunity, I will,” Hussain Al-Abdulla, a Qatar Investment Authority board member, told Bloomberg at the Doha Business Roundtable event, when asked whether the emirate plans to expand its holding after the German car makers combine.

Speaking at the Economist Doha Business Roundtable event in Doha on Tuesday September 29th, Rami Ghandour, executive director of the water and wastewater company Metito, said that Gulf-based SWFs are now focusing on investing in their region.

The event was one of the launch events for Qfinance, a new resource for finance professional worldwide, published last week by Bloomsbury Publishing and the QFC.

But speaking at the same event, Alastair Newton, managing director and senior political analyst at Nomura International, said he does not believe the sovereign wealth funds would have put such an effort into laying down the Santiago Principles if they were going to abandon investing overseas.

The Santiago Principles received scant media coverage at the time since the announcement on October 11th 2008 coincided with the collapse of his old firm Lehman Brothers.

Newton also pointed out that protectionism against SWFs—such as the backlash against Dubai Ports’s P&O acquisition in the US—was ill-grounded and was in fact barely disguised xenophobia.

Speakers at the event, subtitled “Gulf 2020: Scenario planning in a post-crisis world economy,” also agreed that the biggest threat facing the Gulf region is the development of nuclear weapons by Iran, or a nuclear accident in Iran polluting the region’s water supply.

Short URL: https://www.ianfraser.org/?p=939

Posted by Ian Fraser on Oct 7 2009. Filed under Blog. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry