Fear that sovereign wealth funds could destabilize the markets through a deliberately abrupt massive rebalancing or use their economic leverage to coerce political objectives is probably overstated. Ownership, after all, is not sovereignty.
Should a SWF insist that a company in which it had significant ownership act in a way contrary to the interests of its host country, that government could take action to rectify the situation, as it would with the branch of a foreign-owned firm. What is more, any effort to use ownership to withhold an otherwise economically viable product or service, for whatever reason, would simply invite competition to fill the gap.
To be sure, governments do not always have a profit motive and so their interests might well differ from the usual run of shareholders, but in that sense, SWFs are no different from large public funds in the United States or from foundations that periodically use their investment power to pursue social agendas.
Still, some governments have become so concerned about the risk that they have seriously begun to contemplate capital controls that could keep some or all SWFs out of their markets. In response to this threat of “financial protectionism,” as it is called, the International Monetary Fund has begun to call for some kind of regulation, less out of sympathy with government concerns than in an effort to assuage them and thereby head off any such attempt to interrupt capital flows. Leadership at the IMF has already asked a number of SWFs — the $330 billion Singapore Government Investment Corp. and the $159 billion Singapore Tamasek Holdings, the $387 billion Norwegian Government Pension Fund-Global, and the $875 billion Abu Dhabi Investment Authority — to draw up a code of conduct, including a call for greater transparency.
Strangely, even though no regulatory body has the authority over SWFs, there is a good chance of compliance with such a code. SWFs are as concerned as the IMF is about financial protectionism and are eager to do what they can to remove the temptation for governments to move in this direction. They are especially concerned about being singled out for exclusion. After all, a government could allow some SWFs and exclude others, because, say, they are less transparent or less forthcoming. On this basis, if just a few funds comply with a code, most, if not all should follow. It is surely indicative that Singapore, which resisted disclosure initially, has begun to speak about greater transparency.
Although the future of the IMF's code still remains in doubt, it seems likely that SWFs will face some kind of compliance burden going forward. Even more likely, however, markets will have to deal with the funds' growing power. Indeed, SWFs are as likely to use that power to make disclosure demands of companies and financial institutions as the regulators are to place such demands on them. Their standards and their needs will become an increasingly larger part of financial life for bankers, for securities dealers and for asset managers. Indeed, SWFs could cause a revolution of sorts in financial dealing and reporting, perhaps as big a change as the institutionalization of investing did in the United States after the passage of the Employee Retirement Security Act of 1974.
Milton Ezrati is a partner and senior economic strategist of Lord Abbett & Co., Jersey City, N.J.
