SWF Radar

The Age reports that, “[Australian treasurer] Wayne Swan has signalled his readiness to block acquisitions of controlling stakes in Australian resource companies by Australia’s resource customers, a move that comes amid an unprecedented run of foreign investment applications from Chinese state-owned companies.”

Thomson Reuters reports that, “Poverty-ridden countries reaping the benefits of soaring oil and commodity prices should be investing their wealth at home, not putting it in sovereign funds, a senior United Nations official says.”

ArabianBusiness.com reports that, “The British building industry could be bought for the price of a single Middle Eastern mega project, analysis of the value of the country’s largest companies reveals.”

Thomson Reuters reports that, “China will provide an additional $135 million in financing to rebuild Angola’s electricity, water and road systems, expanding its stake in the oil-rich African nation, Angola’s state-run ANGOP news agency said on Friday.”

Thomson Financial reports that, “The Qatar Investment Authority (QIA) has raised its stake in J Sainsbury Plc, the UK’s third biggest supermarket group, to 26.0 percent.”

The report adds that a QIA notification to the Stock Exchange revealed that the fund now owns 454.52 million shares in the group, up from 442.2 million.

Thomson Financial reports that, “French President Nicolas Sarkozy said he intends to make state-owned bank Caisse des Depots et Consignations (CDC) into a sovereign fund.”

Dow Jones reports that, Japanese Bank Minister Yoshimi Watanabe showed Thursday a supportive stance toward a government panel proposal for the creation of a sovereign wealth fund to manage the nation’s pensions, but warned that steps must be taken carefully.”

The article adds that, “A panel of the ruling Liberal Democratic Party, led by former bank minister Yuji Yamamoto, suggested the creation of a Y10 trillion sovereign wealth fund using public pension assets. … However, the group avoided calling on the government to actively manage the country’s huge foreign currency reserves, in response to opposition from other lawmakers and the finance ministry.”

As I have argued previously, categorizing a fund that invests public pension assets (which are, at least in Japan’s case, not easily described as sovereign assets) as a sovereign wealth fund raises questions about SWFs and the current debate surrounding them.

It should be noted though, that Edwin Truman of the Peterson Institute includes in his list of sovereign wealth funds (PDF) (page 8) several pension funds that are funded (at least primarily) through employee contributions. These include Japan’s Government Pension Investment Fund (GPIF), the assets of which would no doubt make up the bulk of the assets invested by the Japanese sovereign wealth fund under discussion. Truman even suggested recently that the GPIF may in fact be the world’s largest SWF.

Thomson Reuters reports that, “Japanese Vice Finance Minister Hiroki Tsuda said on Thursday Japan must very carefully consider the establishment of a sovereign wealth fund – an idea floated by some ruling party lawmakers.”

The National reports that, “The Abu Dhabi Investment Authority (Adia) is backing Citigroup to ride out the subprime storm, despite its 44 per cent loss since taking a US$7.5 billion (Dh27.5bn) stake in the world’s largest bank in November, an Abu Dhabi investment fund manager said yesterday.”

Bloomberg reports that, “Brazil’s President Luiz Inacio Lula da Silva will send a bill to Congress tomorrow [Thursday] to create a sovereign wealth fund, Finance Minister Guido Mantega said.”

AltAssets reports that, “Dubai International Capital has appointed David Smoot, co-founding partner of Morgan Stanley Private Equity, as managing director, private equity.”

The Oxford International Review (OIR) has published an English-language working paper (PDF) on Chinese-language literature on sovereign wealth funds, especially the CIC.

The OIR blog writes that, “The goal of this draft paper is to identify the main themes in the Chinese language press in order that we might better understand and characterize the Chinese views on the CIC–focusing on its role, mission and geopolitical impact.”

The Seeking Alpha blog writes that, “Investment banking is a relationship and sales business; SWFs representing their countries were probably returning a favor to Wall St. for issuing all the IPOs of their government-linked enterprises in the US financial market for the last couple of years. But once they realize they are the 1st round of suckers on this rip-off capital raising game, the relationship goes sour and it becomes difficult to squeeze more money out of their pocket in the future.”

Thomson Reuters reports that, “Japan’s public pension fund [the Government Pension Investment Fund (GPIF)], the world’s largest, said on Wednesday [at the Reuters Japan Investment Summit] it may consider alternative investments in the future, but it must take into consideration risks, market size and other factors.”

The Shanghai Daily quotes David Lewis, Lord Mayor of the City of London, on business delegation to Shanghai, as saying that, “Shanghai deserves to be among the world’s top 10 financial centers, because it has a developed infrastructure, a recognized brand name and perceptions outside China of what it should be.”

Bloomberg reports that, “Saudi Arabia’s foreign reserves will increase 65 per cent to $595 billion by the end of 2010 on record fiscal surpluses, EFG-Hermes Holding SAE said.”

The article adds that, “Saudi Arabia plans to start a sovereign wealth fund with $5.3 billion this year, to be managed by The Saudi General Investment Fund.”

Thomson Reuters writes that, “Japan’s Liberal Democratic Party is set to call for a 10 trillion yen sovereign wealth fund using public pension funds, the Nihon Keizai Shimbun financial daily reported on Wednesday.”

The article adds that the LDP’s proposal comes amid calls for Japan’s $1.44 trillion state-run Government Pension Investment Fund, the largest in the world, to seek higher returns.

Categorizing an investment vehicle set up to invest the assets of the Government Pension Investment Fund as an SWF adds more vagueness to the already vague term “sovereign wealth fund.”

The Government Pension Investment Fund is, according, for example, to an OECD working paper (PDF) released in January 2008, a social security reserve fund (SSRF), defined as a fund that is “set up as part of the overall social security system, where the inflows are mainly surpluses of employee and/or employer contributions over current payouts, as well as, in some cases, topup contributions from the government via fiscal transfers and other sources.”

According to the report, SSRFs live alongside sovereign pension reserve funds (SPRF), which are “established directly by the government (completely separated from the social security system), [with] financial inflows… mainly from direct fiscal transfers from the government,” as one of two sub-categories of public pension reserve fund (PPRF).

Since the definition of SSRFs, of which the Government Pension Investment fund is an example, contains reference to “mainly surpluses of employee and/or employer contributions over current payouts”, such funds can only at a stretch be considered to relate to sovereign wealth, unlike their SPRF siblings. The acceptance of the term “sovereign wealth fund” to describe a vehicle designed to invest the assets of such an SSRF would therefore suggest that the sovereign character of assets under management is not a necessary condition for the categorization of such an investment vehicle as an SWF.

Although this may seem academic, it suggests that the concerns raised by sovereign wealth funds are not concerns about sovereign wealth per se but are in essence concerns about something else, such perhaps as the (at least potential) political manipulability of funds that invest abroad. If this is the case and if the concerns have indeed been misunderstood, then the distinction in the context of sovereign wealth fund investment between SWFs (in the form of such funds as ADIA and CIC) and, say, public pension funds may come to be recognized as one without a substantial difference.

Vladimir Putin’s denial to Henry Paulson yesterday of the existence of a Russian SWF, while the National Wealth Fund is generally considered to be an SWF, suggests (since the National Wealth Fund has yet to invest abroad) that engaging in foreign investment may be considered a necessary condition for categorization as an SWF, while the sovereign character of managed funds may not.

The fact that SOEs have always been discussed in the context of SWFs (and that the DP World and CNOOC debacles kicked of the contemporary debate now considered to be a debate about sovereign wealth funds in the first place) suggests, in turn, that fund-like character is also not a necessary condition for categorization as an SWF. Note also that Gazprom and other Russian SOEs are also often mentioned in the context of sovereign wealth investment, as are Chinese banks and steel companies, among others.

And the clearest recent example of protectionism against a foreign fund is that of CPPIB’s failed attempt to acquire a 40 percent stake in Auckland Airport, which was scuttled by the New Zealand government for questionable reasons. Although CPPIB is often mistaken for a sovereign wealth fund, it in fact shares very little in common with SWFs, and certainly nothing substantial. Yet many of the concerns raised about CPPIB in the context of the potential New Zealand investment were, in essence, identical with those raised in the west about SWFs. Again this suggests that the entire debate may not, in essence, be about sovereign wealth funds or even necessarily about foreign state investment - or that it may at least evolve into a different debate.

RIA Novosti reports that, “Russia’s Reserve Fund, set up to accrue surplus revenues from oil exports, totaled $130.3 billion as of July 1, while the National Prosperity Fund [also known as the National Wealth Fund] stood at $32.85 billion, the Finance Ministry said.”

Thomson Merger News reports (free subscription required) that, “The majority of sovereign wealth funds perceive themselves as longer term investors than private equity funds, according to latest research from law firm Norton Rose in association with the Emerging Markets Private Equity Association.”

China.org.cn writes (among many other things on the CIC’s asset allocation plan) that, “Eyebrows have been raised by the fact that CIC, the second largest shareholder of Morgan Stanley, assigned the design of the assets allocation plan solely to that company.”

David Robertson, business correspondent of The Times, writes of ADIA’s investment portfolio that, “This looks very similar to [the portfolio of] any other conservatively run pension fund and it seems the more we learn about SWFs, the more we realise they are not malevolent capitalist forces but are actually rather dull.”

In the article he also suggests a reason for why the IMF’s International Working Group of Sovereign Wealth Funds has called its guidelines, due to be published in September, the “Generally Accepted Principles and Practices” (GAPP), writing that, “This mouthy title came about because the SWFs balked at anything that sounded like a code of practice – anything, in other words, that sounded like the IMF imposing rules.”

He adds that, “These principles will almost certainly turn out to be pointless and unnecessary.”

Several days ago I suggested that, besides having a bad name and being potentially unnecessary, such rules will certainly also be unformulable.

Still, maybe the IMF will pull the rabbit out of the hat.

Emirates Business 24/7 writes that, “Sovereign wealth funds are turning to emerging markets as a safe haven away from heightened political scrutiny and lacklustre returns in Western markets, according to [Anand Krishnan, chief operating officer at] Dubai International Capital (DIC).”

People’s Daily reports that, “The National Council for Social Security Fund [NCSSF] will become the exclusive strategic investor for China Development Bank (CDB), which is being restructured into a commercial bank, a source said yesterday.. … Analysts say the social security fund [NSSF] has gradually become the largest source of capital for equity investment in the country. The fund is expanding into alternative investments as it seeks to gain higher returns, they say.”

RIA Novosti reports that, “At a meeting with the Russian prime minister [on Monday], Henry Paulson told Vladimir Putin that the U.S. welcomed investment, including from state sources, and would do everything to make sure the investment flows continue.”

Thomson Reuters reports that, “Russia does not yet have a sovereign wealth fund (SWF) but is working to create one, Prime Minister Vladimir Putin told U.S. Treasury Secretary Henry Paulson on Monday.”

The article quotes Putin as telling Paulson that, “Since we do not have a sovereign wealth fund yet, you are confusing us with someone else. But we are ready to [create a SWF], especially if you want us to.”

Russia’s National Wealth Fund (also known as the National Welfare Fund or National Prosperity Fund), which was formed by splitting the Stabilization Fund in two (with the greater part of the assets being assigned to the Reserve Fund, the other fund formed in the split), is generally considered to be Russia’s SWF.

Taking the second part of the Putin quote at face value, it could make sense for the United States to ask that state foreign investments be channeled through SWFs that identify themselves as such. This would make such investments easier to track and regulate and would certainly facilitate and add significance to the work of the IMF’s International Working Group.

But the US Treasury’s recent agreement with its Chinese counterpart to clear the way for indirect foreign investment by China’s SWFs via the country’s state-owned enterprises disconfirms that such transparent channeling is being explicitly sought.

Bloomberg reports that, “The Chinese national pension fund’s [NSSF] investment gains increased almost sixfold in 2007 from a year earlier as returns from its stock holdings more than tripled, said the Beijing-based fund.”

The NSSF is described by the China Economic Review in its July issue as China’s third SWF alongside the CIC and SAFE. (The China Economic Review article appears to have been taken down since yesterday).

PRWeek reports that Edelman’s European health MD and EVP Kate Triggs will leave the agency in three months to head up communications at Mubadala Development Company.

This news follows the appointments at fellow Abu Dhabi investor ADIA of a global communications chief (Euart Glendinning) in May and a head of internal communications (Mark Darby) earlier this month.

The Oxford International Review (OIR) (“an international affairs journal produced by young [Oxford-University-affiliated] scholars along with experienced advisers and world leaders”) has launched a blog on SWFs and national security.

It will publish not just analytical pieces but also articles translated from Chinese, with two of the three main contributors having native and fluent Chinese skills, respectively. The initial focus will be on the China Investment Corporation.

The academic supervisor on the project is Gordon L. Clark, Halford Mackinder Professor of Geography at Oxford University and Head of the Oxford University Centre for the Environment. His book Pension Fund Capitalism looks at issues relating to the use of non-financial investment criteria by pension funds.

For those interested, the OIR blog has an RSS feed.

Thomson Investment Management News reports (free subscription required) that, “The investment vehicles are pouring money into commodity index futures but United States Congress is considering measures to limit speculation.”

ArabianBusiness.com reports that, “Norway’s $400 billion sovereign wealth fund [the Government Pension Fund - Global] will target investment in emerging markets including Egypt as soaring oil prices help it grow by $1 billion a week, a senior executive told Arabian Business on Monday.”

The Wall Street Journal reports on JPMorgan’s appointment of John Moore, formerly Bear Stearns Cos.’ Asia CEO, to lead a global team focused on serving sovereign wealth funds.

Thomson Reuters reported last week on the appointment.

Emirates Business 24/7 writes that, “Dr. Nasser Al Saidi, chief economist at the Dubai International Financial Centre Authority, told the [GCC Institutional Investment Summit] that GCC funds’ earnings from foreign investment are set to outpace their oil income on the back of surging fuel prices.”

Brad Setser writes that, “If oil stays at $140, the Gulf — based on projections that imply GCC spending and investment will rise so that the GCC needs $55 to $60 oil to cover its import bill — the big GCC funds and central banks should add close to $400 billion to their foreign assets in 2008.”

The big four he lists and discusses are the Saudi Arabian Monetary Agency (SAMA), the Abu Dhabi Investment Authority (ADIA), the Qatar Investment Authority (QIA) and the Kuwait Investment Authority (KIA).

The Telegraph reports that, “Qatar’s sovereign wealth fund has appointed Ernst & Young to restructure its entire debt-laden £3bn healthcare and property portfolio.”

The Guardian reports that, “Foreign sovereign wealth investors are targeting London’s hedge fund industry as they seek to boost returns on their vast savings, much of it generated from trade with the west in oil and other commodities. The hedge funds have seen billions of pounds pour into their investment plans at a time when the industry desperately needs cash to replace debt funding that collapsed during the credit crunch.”

Thomson Reuters reports that, “Top fund executives meeting in Barcelona this week [at FundForum International 2008] will debate how to attract assets from sovereign wealth investors and the merits of absolute return funds as they face up to a tough environment of lower inflows.”

Thomson Reuters reports that, “Sovereign wealth funds should be treated like any other institutional investor and not have special rules imposed on them, Henry Azzam, head of Deutsche Bank in the Middle East, told a conference on Sunday.”

The article makes reference to the IMF, whose International Working Group of Sovereign Wealth Funds (IWG) is currently working on a set of Generally Accepted Principles and Practices (GAPP) for SWFs.

KUNA reports that, “Kuwait Investment Authority (KIA) is a long-term investor and did not suffer losses worth USD 1.5 billion for its investments in Merrill Lynch and CitiGroup, as was recently claimed, said Managing Director Bader Al-Saad on Sunday.”

The Financial Times reports that, “China’s $70bn (£35bn, €44bn) National Council for Social Security Fund [NCSSF] is launching five new externally managed funds that will be benchmarked to MSCI Barra indices, as part of a continuing trend for the country’s pension and sovereign wealth funds to seek better returns abroad.”

The NCSSF is responsible for the management and operation of the National Social Security Fund (NSSF), China’s national pension fund.

Thomson Reuters reports that, “Estimates placing the size of Abu Dhabi’s sovereign wealth fund [ADIA] at $800 billion are exaggerated, Sheikh Khalifa bin Zayed al-Nahayan, ruler of Abu Dhabi and president of the United Arab Emirates, was quoted as saying.”