SWF Radar NonFinancialInvestmentCriteria

Financial Week writes that, “The economic and national security threats posed by sovereign wealth fund are vastly overrated, and U.S.-based pension funds are a greater threat to the nation's economy, according to former Treasury undersecretary Randal Quarles.”

Coincidentally, I touched on this issue in a post earlier today.

LBO Wire reports that:

A bill pending in the California State Assembly could, if passed, hurt two of the country's largest investors' ability to put money into the private-equity asset class.

The bill, AB 1967, seeks to stop the California Public Employees' Retirement System and the California State Teachers' Retirement System from investing in private-equity firms owned in whole or in part by a sovereign-wealth fund, or in any funds managed by those PE firms. It was introduced by Assembly Member Alberto Torrico on Feb. 14.”

It should be noted that in terms both of shareholder- and social and environmental activism, CalPERS is perhaps the world’s most powerful activist investor. On account of its size and of the ability of its managers to focus away, at least to a small degree, from the financial bottom line, it surely has many characteristics in common with the SWFs that are the indirect target of this proposed legislation.

In fact, many of the issues raised by SWFs regarding their potential non-financial activism as investors and their potential use of non-financial investment criteria echo issues that have been stirred up for decades by (mainly public) pension funds.

The Associated Press reports that, “[EU trade commissioner Peter] Mandelson met [today] with the chairman of China’s US$200 billion sovereign wealth fund, Lou Jiwei, and said he pressed for more information about the fund and for assurances its foreign investments will be commercially motivated and free of politics. ‘We don’t want to close our markets to Chinese investment, but we have to be reassured that it is commercially motivated,’ Mandelson told the BBC. ‘What I’ve said to him is two things: First of all, we need greater transparency, we need clear principles of governance being operated by these sovereign funds, but we also need reciprocity.’”

The Mail on Sunday reports that, “Britain’s biggest shareholders issued an explicit warning to the huge investment arms of foreign governments this weekend - you can take large stakes in UK companies but only if your agenda is not political.”

The article quotes Peter Montagnon, head of investment affairs at the Association of British Insurers (ABI), as saying that, “We are supportive of their right to have access to our markets. … [But c]learly it is going to cause a reaction if they are seen to be operating with any kind of political motivation.”

The article states that the ABI’s members speak for about a quarter of the shares in London.

Douglas McIntyre writes at BloggingStocks that, “Funds and corporation[s] from the West have been putting money into Asia and the Middle East for years. Big U.S. companies are not required to sign documents disclosing their intentions when they make investments overseas. Plans by Congress and the EU to push legislation to regulate capital from abroad may back-fire. When U.S. and Europe banks need more cash, sovereign funds may simply elect to invest elsewhere.”

Money Morning writes that, “It's likely [that, with their foreign sovereign wealth investments, the Russians will] look to a combination of hard assets and operating businesses but in a uniquely Russian twist, they'll probably seek actual control, too. And that smacks of Russian nationalism.”

Reuters reports that, “U.S. Treasury Secretary Henry Paulson said on Thursday that his agency was closely monitoring government-owned wealth funds to ensure that they were motivated by financial rather than political goals. ‘What we’re focused on is to make sure that what they’re driven by is commercial, economic purposes,’ Paulson told the Senate Banking Committee.”

The Financial Times writes that, “The political heat surrounding sovereign wealth funds in the US increased on Wednesday as Chuck Schumer, the powerful New York senator, said he would consider legislation to improve their transparency and ensure they did not invest with ‘non-economic motivations’. Mr Schumer said that state-controlled investors from the Middle East, China and elsewhere ‘need to do a lot more to make their case’.”

The New York Times writes that, “Officials involved in the drafting of a code, which the International Monetary Fund is overseeing, say that many funds are resisting the pressure to embrace even a voluntary set of ‘best practices’ that disavows politics. The funds argue that a code is unnecessary because their investments are already strictly commercial in nature. In addition, leaders of funds in Russia, the Middle East, China and other parts of Asia say that the West's demand for regulations is hypocritical in light of the failure to regulate European and American banks and hedge funds.”

Peter Navarro, a business professor at the University of California-Irvine, writes in an opinion piece for the Christian Science Monitor that, “[T]he rapid emergence of SWFs calls for a coherent US policy. One major obstacle to swift action is the constructive role SWFs appear to be playing in the current global financial crisis in providing critical liquidity. This should not lull the US into a false sense of security.”

He suggests that, “China may seek to gain control of critical sectors of the US economy - from ports and telecommunications to energy and defense.” But this is questionable at best. Not only are there laws against foreign entities’ owning e.g. US defense companies, but US lawmakers would have no problems vetoing via CFIUS any proposed acquisition by the Chinese of a substantial stake in a sensitive company.

If the sentiments expressed by Navarro really take hold in the United States - and it should be noted that his article is based on testimony he gave before the US-China Economic and Security Review Commission yesterday - then the insistence by many SWFs on remaining almost entirely opaque will surely be a major contributing factor.