With SWF Transparency Calls Mounting, Some Quietly Protest

(September 24, 2009) – While many have called for sovereign wealth funds (SWFs) to increase transparency in governance and investments, a few quiet voices are warning that such a move might have the unintended consequence of shortening their investment horizons.

SWF funds, increasingly prominent on the international investment scene, often have extremely long-term investment horizons due to their often explicit goal of creating a store of wealth for when natural resources eventually are depleted. This often can allow them (at least in theory) to capture an illiquidity premium—essentially gaining excess returns in exchange for holding hard-to-sell assets. While some SWFs are open as to their investment strategies, holdings, and governance, others have been lambasted for their lack of transparency.

Two prominent critics of the lack of SWF transparency have been New York-based RGE Monitor’s Rachel Ziemba and the Council on Foreign Relations’ Brad Setser. “At its most basic, the investment vehicles of the Gulf can do as they please as long as their sovereign approves,” Ziemba said in an interview with ai5000 in March, lamenting the lack of transparency and accountability of SWF—and the massive Gulf funds in particular—with regard to their investment process and success.

However, at least one prominent industry veteran disagrees. “SWFs are under greater scrutiny than ever before, not least from their domestic audiences,” John Nugee, head of official institutions at State Street Global Advisors, recently told Reuters. “The level and tone of some of the criticism by national media for high-profile losses on selected headline acquisitions might even jeopardize their ability to take the long-term investment positions that have given them such a comparative advantage.”

Gary Smith, head of central bank, supranational, and SWF business at BNP Paribas Investment Partners, warns that an excessive push for transparency, coupled with recent poor performance, could lower the risk appetite of SWFs and encourage them to favor safer instruments such as bonds. “Following the whole push toward transparency, funds opened themselves up for a monitoring process that did not exist,” Smith said. “We have transparency problems for them. The consequences are that these guys are being marked to market on a daily basis by domestic constituents.”