Disclosure on sovereign wealth funds will address concerns in West

08 February 2008
Rich countries using professional investment strategies to channel their capital towards those countries most in need of it sounds like capitalism in action. Yet Washington and its European allies do not seem impressed, especially when the money is coming from the overflowing coffers of Middle East governments.

In some senses, they are right to be cautious. The lack of transparency in terms of the size and objectives of investments made by sovereign wealth funds makes financial markets nervous. Their investments tend to be much larger than those of other global funds, and unwinding those positions without warning could create panic selling among other investors.

These are legitimate concerns. Yet the West appears more worried that the funds are politically motivated. Here there are fewer grounds for concern. Most Middle East funds are staffed by ex-Wall Street or City of London bankers, rather than political ideologues. And their track record is one of passive, longer-term investment, rather than an activist policy that changes with the political mood.

Although sovereign funds only hold about 2 per cent of assets traded in the world, they are estimated to have as much as $5trillion to invest and this could hit $12trillion by 2015. Already they are bigger than the private equity and hedge fund markets, which have also been hit by accusations of opacity.

Protectionist rhetoric is growing in the US and Europe, but after rescuing of some of the developed world’s biggest banks, sovereign funds are in a relatively strong position.

They should capitalise on this before the tide turns again. Greater disclosure on what investments they have made and the objectives they have would go a long way towards allaying fears about their motives.

So far, there is little indication that the Gulf funds are interested in addressing the concerns of the West, yet this may be their best moment to do so.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.