Sovereign wealth funds, investing in the West, protectionism/xenophobia, transparency

Sovereign wealth funds have been in the news lately. They are government-run investment vehicles. Many oil-rich Middle Eastern countries have them. China, Norway, Singapore, and a few other countries also have SWFs. Singapore's wealth is mainly from its tax revenues as a financial hub.

A number of major Western banks took investments from SWFs, including Citi (U.S.) and UBS (Switzerland). These banks had made mistakes larger than most in the subprime debacle. There is little doubt they needed the cash.

And there has been much debate on how good this is, on whether Americans are selling their assets to foreigners.

Seeking Alpha has one such article. The author highlights the fact that SWFs are being invited to participate in a best-practices code, which would include promising not to invest to gain influence over companies' operations. He feels this is a sham, that holding large stakes automatically gains you influence. He says that an SWF could easily build a large stake without the intent to unduly influence the company, and then the company might make a misstep, and then the SWF could exert influence. For example, Prince Alaweed of Saudi Arabia owns around 3% of Citigroup. He exerted some influence to force Chuck Prince, the now ex CEO, out.

On one hand, this is xenophobia, plain and simple. The complainers would not be complaining if Westerners were buying up companies in the Middle East and Asia, and trying to run them. The World Bank is known to propagate a nakedly free-market ideology, and to exert undue influence over governments when it makes loans.

On the other hand, the concerns over unaccountable foreign investors are valid. Yes, they are. Many SWFs make very poor disclosure about their holdings and their objectives.

I can speak for Asians: we have much to learn about transparency, about doing things in the light of day to show we have nothing to hide. Yes, Westerners talk transparency but often don't follow through. That doesn't matter.

Transparency is integral to democracy. It ensures your accountability to the lives of those you influence. Those who have power must always be accountable. If you shy away from accountability, it is logical to conclude that you have something to hide.

One argument raised by SWFs is that disclosing their holdings would put them at a competitive disadvantage to other investors, like hedge funds. Tony Tan of Singapore raised this point. He doesn't know what the &^!# he's talking about. Warren Buffett is required to disclose his holdings. The Securities and Exchange Commission also allows him (and other investors) to do so on a quarterly basis, well after the trades are made. I think the SEC even allows investors like Buffett to not disclose their trades if they are still building a position.

In any case, it's really too bad that the SWF issue isn't making leaders in the West think about how they might be interfering with the sovereignty of other countries.

PS: in the investing world, a fund's performance is compared to a benchmark, such as the S&P 500 index, which is an index of large US companies like Microsoft, General Electric, Wal-Mart (urk), Altria (urk!) Exxon Mobil (urk!!), etc. Alpha is a numerical measure that tries to quantify consistent returns by a fund over the benchmark. Basically, every fund that isn't an index-tracking fund seeks alpha. By the way, most of them fail.