Sovereign funds open up cautiously

Sovereign wealth funds have captured the imagination of investment professionals and politicians alike over the past few years. Perhaps because of the large sums of money at their disposal, there has been a degree of wariness about the intentions of some. Most, after all, are controlled by governments.

But, following the formation of the International Working Group of Sovereign Wealth Funds, in October 2008, and then the International Forum of Sovereign Wealth Funds in April 2009, the air around them seems to have cleared.

With the publication of each successive annual report of the 23 members, a pattern is emerging of a new class of investor which is rather more cautious and certainly more committed to professional management than previously thought.

This group makes up about half the total number of sovereign funds in the world, depending on how they are defined, and the formation of both the Working Group and the Forum indicates a desire to promote transparency and to make investment decisions on a fully professional basis, without any hidden (read ‘government’) agendas.

Even though most sovereign funds have no liabilities, as such, unlike pension funds, they have recently openly discussed ways to improve their risk oversight and management.

At the last Forum meeting, for instance, in Sydney in May, a paper was presented on ‘Good Practices in Investment and Risk Management’. It followed a member survey on the topic and a similar preliminary discussion at the previous meeting in Baku, Azerbaijan, in October 2009.

The latest presentation showed that the sovereign fund members were dissatisfied with conventional tools of risk management, including VaR (value at risk) and suggested a new governance framework for funds to consider.

The full presentation is available on the www.ifswf.org website.

The example of a “good” structure given is for: “The Leadership Group and full board remains accountable for all risks, however, risk review and monitoring is shared between various board and management committees.”

The risks are categorised as: operational risk, legislative risk, investment risk, strategic risk, and reputational risk.

Underscoring this concern with risk by sovereign funds, the recently published annual report of the China Investment Corporation spells out how that organisation sought to enhance its risk management oversight and processes during the last year (see separate story).

The CIC’s membership of the IFSWF is mentioned proudly in the report by the fund’s chairman and chief executive, Lou Jiwei. The chairman of the separate Board of Supervisors of the CIC, Jin Liqun, is deputy chairman of the IFSWF, and Beijing is to host the next meeting in April 2010.

This report is the CIC’s second, having being formed in September 2007, and provides a thorough account of the year’s activities but, more importantly, a clear picture of the fund’s aims and aspirations.

Greg Bright is the Beijing-based publisher of Top1000Funds.com