Sovereign funds 'must dialogue' with pension funds
GLOBAL - The financial crisis is likely to make sovereign wealth funds (SWF) more, not less, active in their pursuit of strategic objectives and engagements as shareholders, and they should therefore pursue fuller dialogue with pension funds and other active investors, according to State Street.
The bank, which has worked with government and central bank clients for two decades and whose asset management arm, SSgA, runs almost $300bn for such institutions, was presenting its latest "Vision" paper, Sovereign Wealth Funds: Emerging from the Financial Crisis, in London. It acknowledged that SWFs have "significantly reduced their headline activities", partly because of lower oil prices, partly because of increased calls on capital from sponsoring governments to contribute to budgetary expansion and shore up domestic markets, but also because of the attention of the media - including the domestic media in jurisdictions not renowned for press freedoms or challenges to authority.
Officials expect this to be temporary, not least because much of the press criticism has focused on short-term investment underperformance.
"If you can point to other material benefits to the broader economy and society, it will be easier to justify the investments you have made to your wider stakeholders - especially in the face of short-term losses," said Andrew Rozanov, managing director and head of sovereign advisory with State Street Global Markets. "So the strategic objectives will become more important and explicit after the financial crisis, not less."
These strategic objectives are not necessarily geopolitical, but may include diversifying domestic economies away from commodities or global trade, importing expertise or implementing ethical investment policies, as in the case of Norway's Pension Fund - Global, for example.
State Street also expects SWF to move on from their initial policy of waiving voting and directorship rights, to become more active and engaged shareholders.
Both the current domestic focus - which can see "all sorts of issues come into play when governments are both investors and rule-setters for a market", Rozanov observed - and a future of more active engagement internationally will find SWFs occupying a space similar to activist hedge funds and large, activist pension asset owners through the likes of CalPERS, APG and PGGM.
"SWFs need to build up a dialogue with these investors," said Rozanov.
While SWFs have started to recognise their relationships with one another - by forming the International Working Group of Sovereign Wealth Funds with its 24 best practice guidelines (the "Santiago Principles") and engaging to co-ordinate their activities via the International Forum of Sovereign Wealth Funds - similar forums to bring them together with other investors do not exist.
"There is an appetite for dialogue among other investors," said John Nugée, managing director and head of SSgA's Official Institutions Group. "But the dialogue there has so far usually happened on a one-to-one basis, sometimes facilitated by organisations like State Street."
Rozanov pointed in particular to individual relationships established when SWFs were first set up as an example of what can be achieved.
"Norway is reported to have strong relations with PGGM and APG, for example, and delegates from China visited endowments like Yale and Harvard, and more recently, GIC [the Government of Singapore Investment Corporation] set up an advisory panel made up of people specifically with institutional investment experience," said Rozanov.
At the same time, there have also been some moves from associations, as he continued: "In terms of activism, the ICGN [International Corporate Governance Network], whose subscribers are primarily large institutional asset owners, has proactively reached out to SWFs in Russia, China, Kuwait, Norway and elsewhere to try to bring them closer to ICGN principles and models," said Rozanov.
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