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Archived News - May 2008
5/30/2008
By Carl Linaburg
The initial thought that may be credited to the development of the Linaburg-Maduell Transparency Index was to offer simple principles of disclosure that sovereign wealth funds could use to increase levels of trust shared among the public of the economies they invest in. By following simple measures of our transparency index our hopes would be for funds to follow in suit without being told what to do by an internationally drafted agreement.
Major hurdles have been found during months of attempting to identify sovereign wealth funds and their enterprises. The 10-point index that we created does not give negative points or penalties for failing to disclose certain critical items, which is why we stress a score of 8 to be considered adequate in transparency. In correlation with ever-changing sovereign wealth funds our transparency index will change in terms of rating and principles.
While some funds are easy to assess others have discombobulated government structures, identify their enterprises on one-way roads, fail to identify their enterprises, or flat-out deny their status as a sovereign wealth fund altogether. Most sovereign wealth funds tend to not disclose their international holdings in order to avoid confrontation with the public. Contingent pension reserve funds such as the Government Pension Fund-Global of Norway and the New Zealand Superannuation Fund are required to disclose this type of information usually by law. Some entities, particularly in Asia but not limited to Singapore's Temasek Holdings, deny being a sovereign wealth fund altogether. Many funds do not want to be lumped in as sovereign wealth funds; especially if an international agreement is to be adopted forcing them to undergo increased compliance. In the case of Temasek Holdings, their argument against being a sovereign wealth fund lies in lack of government control. Their argument is not within our scope of the definition. What does identify Temasek Holdings as a sovereign wealth fund are other key factors: establishment by government authority, funding source, and types of investing. The disclosure of funding source is partially disclosed for The National Council for Social Security Fund for the People's Republic of China (NSSF). From the official website of the NSSF a financial statement from 2004 reveals the funding source. Funding source disclosed from this statement is identified as The National Social Security Fund, whose sources include the fiscal allocation of the central government, capital and equity assets derived from reduction of state-owned shares, capital raised in other manners with approval of the State Council and investment proceeds. The State Administration of Foreign Exchange (SAFE) is responsible for the management of China's foreign exchange reserves. SAFE owns a Hong Kong subsidiary called the SAFE Investment Company which makes purchases in foreign equity investments, such as investments in the French oil company Total.
The Sovereign Wealth Fund Institute recently gave a new label to a certain type of sovereign wealth fund subsidiary. Sovereign wealth enterprises are subsidiaries that complete the objectives of the parent sovereign wealth fund, which usually involves investment in international equity. These enterprises are not a new phenomenon and the amount of sovereign wealth enterprises are hastily increasing. The government structures of these enterprises originate from government authority to sovereign wealth fund to subsidiaries and enterprises. Sovereign wealth enterprises are owned indirectly through the sovereign wealth fund, where some or the entire funding source is derived. An example of a similar structure can be found through Jafza International. The funding for this organization may come from capital borrowed from non-governmental financial institutions, but given that these organizations are indirectly established through a sovereign wealth fund; this is unlikely the case. The official website of Dubai World, a subsidiary of the Investment Corporation of Dubai, lists Jafza International as one of its featured companies. Dan Chapman of the Atlanta Journal Constitution in his article Hope, suspicion as countries fat with cash invest in America, noted earlier this month the investments of Jafza International in the United States. Dubai World argued his statement regarding direct government control of Jafza International by UAE government officials. While Jafza International may not be directly controlled by the government there are other factors to note. Through the legal disclaimer of Jafza International visitors are notified that ownership lies with their parent organization Economic Zones World FZE. The Economic Zones World official website does not disclose a parent organization in its legal disclaimer. On page 10 of their prospectus, Economic Zones World FZE broadly identifies governance structure as the following:
The use of a sovereign wealth enterprise makes sense. Although governance structure may be confusing to some, there are only issues in regards to transparency when pertinent information regarding association to the sovereign wealth fund is left out and when disclosure of these types of associations goes down a one-way street. The inclusion of penalties in transparency assessment, for sovereign wealth funds that fail to disclose critical information, is unnecessary. Sovereign wealth funds need to not be worried about the negative connotation of being labeled as a "SWF", but they need to be aware of the dangers of covering their tracks. When attempts to avoid confrontation are foiled, there will be severe distrust.
The views in this publication are expressed by Carl Linaburg.
Carl Linaburg is the Cofounder and Vice President of the Sovereign Wealth Fund Institute.
www.swfinstitute.org
Back to Carl Linaburg's Research
5/30/2008
Sovereign Wealth Enterprise - A sovereign investment vehicle that is owned and controlled by a sovereign wealth fund.
FAQs
1. Why do Sovereign Wealth Funds (SWF) create Sovereign Wealth Enterprises (SWE)?
A: There are a variety of different reasons. One is for flexibility. A sovereign wealth fund could have a strict investment mandate in place; however, the sovereign wealth enterprise has its own rules. For instance, many public pension funds are unable to short stocks. To get around this they can hire an external manager to manage a portfolio that could have a long-short strategy.
A second reason could be transparency. If a sovereign wealth fund has hundreds of sovereign wealth enterprises, it is harder to track their holdings. Lastly, is to avoid being lumped into the same category as a sovereign wealth fund and avoid the public spotlight.
2. How large are Sovereign Wealth Enterprises (SWE)?
A: We are not certain of the aggregate asset size of sovereign wealth enterprises but they cannot be larger than the total size of sovereign wealth funds since they are merely a component of some sovereign wealth funds.
3. Is a State-Owned Enterprise (SOE) the same as a Sovereign Wealth Enterprise (SWE)?
A: A SOE can be considered a sovereign wealth enterprise if it is directly under the control of a Sovereign Wealth Fund.
5/28/2008
It is true the Canada Pension Plan Investment Board (CPPIB) is a sovereign investment vehicle but it is not a sovereign wealth fund. There is a significant difference between the two investor classes and the lines should not be blurred. Public Pension plans are funded by employee contributions not shifts in foreign exchange assets. According to the Financial Times, "David Denison, president and chief executive of the fund, said: 'We fear collateral damage. Many sovereign wealth funds are new and don't have a track record to show they invest on a commercial basis. But we have transparent approval processes and commercial decision-making.'
Mr Denison said the C$123bn of assets did not come from the government but from the retirement money of 17m Canadians and that the board of directors was totally independent with no political appointees to the fund."
read more: Financial Times
5/27/2008
On May 21, 2008, the Institute for the Analysis of Global Security (IAGS) testified in front of the US House Committee on Foreign Affairs on sovereign wealth funds.
SWF Research Link
read more: US House Committee on Foreign Affairs
5/23/2008
Index-type investors face trouble as the equity markets were greatly effected by various economic events such as the credit crisis. They lost around US $15 billion in the first quarter of 2008. According to Norges Bank which manages the fund, "The first quarter of 2008 was dominated by the financial turmoil that began with problems in the US mortgage market in early 2007 and subsequently developed into a wider crisis in parts of the financial system. Equity markets fell sharply during the quarter, while fixed income markets generated a positive return.
The return on the Government Pension Fund - Global in the first quarter of 2008 was -5.6 per cent in international currency."
First Quarter Report 2008 - NBIM
read more: Norges Bank
5/23/2008
Rumors have it that Brazil might delay the creation of its sovereign wealth fund after all. Brazilian President Luiz Inacio Lula da Silva is considering whether it would be better to start a wealth fund or reduce government debt and trim taxes. This is an issue that many emerging economies face as they continue to build a surplus of wealth. According to Dow Jones, "Brazil's real opened stronger against the U.S. dollar Friday on news the government will delay the launch of its sovereign wealth fund and amid rising oil prices, which are undermining the dollar."
read more: FX Street
5/19/2008
The Kuwait Investment Authority (KIA) has invested in Germany for decades. Now that sovereign wealth funds are growing in asset size, it seems that politicians are worried about their economic power and possible strategic or political intentions. The KIA managing director, Sheikh Badir al-Saad expressed concern over the possibility of increased German legislation on sovereign wealth funds. According to Thomson Reuters, "The German government plans to extend existing legislation that gives Berlin a veto on takeovers of defense firms to include other industries, though Steinbrueck has said Germany does not want to scare off sovereign wealth funds."
read more: Thomson Reuters
5/14/2008
The Brazilian real opened weaker against the U.S. dollar Wednesday on news that part of the dollars for the country's new sovereign wealth fund will be provided by Brazilian Treasury bond issues. The real opened at BRL1.670 to the dollar in spot contract trading on the Brazilian Mercantile and Futures Exchange after ending at BRL1.656 to the dollar Tuesday. The central bank already regularly buys dollars to build reserves, and news that the Treasury will also act pressured the local currency and opens the possibility of conflicts between the two institutions. The fund will be used to contain cyclical volatility in the Brazilian economy and support Brazilian bond and debenture issues. Finance Minister Guido Mantega did not specify how large the fund might be.
read more: FXSTREET
5/14/2008
After reassessment, the Sovereign Wealth Fund Institute received up-to-date reports audited by Ernst & Young for SOFAZ, Azerbaijan's state oil fund. Reports revealed a wealth of information including external managers Clariden, and Deutsche Asset Management that upgraded the fund to a 9.
read more: APA
5/13/2008
Thailand has reserves stemming from non-commodity sources. The central bank is seeking a feasibility study to see if it is beneficial or not to invest their foreign reserves into other asset classes. Another hot topic in the discussion is to see whether the fund would seek strategic controls in companies or to just purely seek higher investment returns.
According to the Nation, "The Bank of Thailand will conduct a thorough feasibility study before making a decision on whether to establish a sovereign wealth fund, Governor Tarisa Watanagase said last week."
read more: The Nation
5/10/2008
According to Thomson Reuters, "The current international market turbulence has produced unprecedented investment opportunities," said Lou Jiwei, head of the $200 billion sovereign wealth fund, established last September to earn higher returns on part of China's vast official foreign currency reserves.
But Lou told a financial conference in Shanghai that CIC would not try to take advantage of the turbulence by acting as a hedge fund and betting on the performance of the economies of individual countries."
Sovereign wealth funds continue to act as economic stabilizers in the financial markets. Funds like the China Investment Corporation, Abu Dhabi Investment Authority, and the like continue to look for great investment opportunities for the long haul.
read more: Thomson Reuters
5/5/2008
The IMF states "an International Working Group of Sovereign Wealth Funds (IWG) was formally established by the meeting to present by October 2008 a set of SWF principles that properly reflects their investment practices and objectives."
read more: IMF
5/1/2008
Established in 2006, Bahrain Mumtalakat Holding Company is the chief investment division of the government of Bahrain. The primary funding source of wealth comes from oil. Currently, their investment portfolio is heavily weighted into the local Bahrain economy in a number of industries ranging from real estate to telecommunications.
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