Governance review to facilitate speedy decisions at SWFs

Sovereign wealth funds are prioritising a review of their internal risk management frameworks and better communication with their stakeholders regarding expectations of financial markets, according to Patricia Pascuzzo, global head of national funds consulting at Mercer.

Pascuzzo, who was invited to speak at the recent Kuwaiti meeting of the International Working Group of Sovereign Wealth Funds said more than half of the 20 SWFs in attendance at that meeting were examining these issues.

She said Mercer was recommending SWFs conduct an organisational-wide review of risk management including financial risk, the approach to asset allocation, operational risks, the organisation of the internal team, and whether to insource or outsource.

“All sovereign wealth funds are different, and a lot don’t have independence from the government,” she said. “Some of them need to review their governance, to make decisions with speed in order to take advantage of
the opportunities in the market.

She pointed to a more dynamic approach to strategic asset allocation as an area of focus for the funds, but given that dynamic asset allocation was a more sophisticated strategy, a disciplined governance framework was also essential.

She said Mercer, which under her lead and with four regional heads was adapting its consulting services and products to the particular needs of these national funds, was seeing a lot of interest in its operational risk management and dynamic asset allocation services.

From an investment perspective, she said many SWFs were still sitting on the sidelines, although some had started looking at alternatives, insurance-linked securities and credit.

At the Kuwaiti meeting in early April, at which Pascuzzo addressed the funds, the International Working Group of Sovereign Wealth Funds formally established the International Forum of Sovereign Wealth Funds that would meet at least once a year to exchange views on issues of common interest and facilitate an understanding of the generally accepted principles and practices, the Santiago Principles, and SWFs’ activities.

David Murray, chairman of Australia’s Future Fund board of guardians, was elected by the IWG members to chair the forum, and Jin Liqun, chairman of the board of supervisors at China Investment Corporation, and Bader Mohammad Al-Sa’ad, managing director of Kuwait Investment Authority were elected deputy chairs.

The forum noted, in particular, the pledge to do whatever was necessary to promote global trade and investment and reject protectionism, to underpin prosperity.

Speaking at the same meeting, Kuwait’s deputy prime minister and minister of foreign affairs Sheikh Dr. Mohammed Sabah Al-Salem Al-Sabah, said it was critical to recognise that conditions and the environment of the global markets and the international financial system were set to change, and it was thus necessary to build trust, and for the sovereign investors to recognise the rebalancing of the global economy, and global interconnectedness.

He said he was optimistic that the decisions taken in Kuwait by the members of the new forum would contribute to a recovery of global capital flows and the investment environment.

The forum will operate in an inclusive manner and facilitate communication among SWFs, as well as with relevant recipient country officials, the European Commission, the OECD, representatives of other multilateral organisations, and the private sector. The forum has also established three sub-committees to work on (i) experiences in the application of Santiago Principles to date, (ii) investment and risk management practices, (iii) international investment
environment and recipient country relationships.

The forum will conduct its inaugural meeting in Baku, Azerbaijan in October, organised by the State Oil Fund of the Republic of Azerbaijan and the Government of Azerbaijan.