All Hail The Sovereign! (Fund)

Anybody and everybody has an opinion on the sovereign wealth funds that seem to be on a shopping spree of late.

With Abu Dhabi getting 4.9 percent of America's largest bank Citigroup through its $7.5 billion injection, as well as recent stake buys of Sony, AMD and the Nasdaq by Middle Eastern funds, the debate and scrutiny on the funds will only intensify.

In its editorial today, the Journal writes on the Citigroup deal:

"More important, no one should be under any illusions that Abu Dhabi's investment is a normal commercial transaction. It comes from a sovereign wealth fund controlled by a foreign government, which has political as much as business interests; from an Arab government that has a troubling history with American banking laws; and it offers Middle Eastern entree into the US financial system that since 9/11 plays a pivotal role in the war on terror."

I personally think the fear regarding these funds is a little overblown and smacks somewhat of jingoism. I can imagine how the emergence of these government-led funds from fast-developing nations will rattle the traditional powerhouses of the US and UK. But I think the close linkages in today's economies mean these funds will be saavy enough to try to avoid any political fallout from their actions.

When China formed its $200 billion investment fund a few months ago, I thought it would become the big bully in the playground. But it doesn't seem to be the case. With the Rio-Tinto-BHP bid, I thought the fund would step in with a counter-offer to safeguard its iron ore supply. But again, no aggressive moves by the fund.

Yet, despite switching their tack by flying low under the radar - taking small stakes, influencing key political figures, having minimal business influence - for these funds, there seems to be no escaping the suspicions over their intentions.

A recent International Herald Tribune article quotes Edwin Truman, senior fellow of the Peterson Institute for International Economics:

"When you have foreign governments holding stocks and bonds, not just Treasury securities, you have to ask whether they will be a stabilizing force or a destabilizing force."

Example in hand: With its $300 billion war chest, Norway is often praised as a model for disclosure of its portfolio strategy, holdings and methods. But it is also political. The fund recently pulled its investment out of Wal-Mart, citing accusations that it violated child-labor laws and scuttled efforts by employees to unionize.

And while we are on the topic of political, let's not forget how Temasek Holdings' purchase of Thailand's Shin Corp last year precipitated the fall of the Thai government. Just this week alone, the Singapore state-own fund unloaded shares in three Chinese companies - Bank of China, China Construction Bank and Cosco Holdings. Some analysts speculate Temasek is trying to reduce its exposure to China's financial market, while the company says it is part of an ongoing move to "rebalance its portfolio."

Nobody really knows where the truth falls.

Some have called for more information from these funds. But I'm skeptical how useful it really is. With Temasek's first annual report three years ago, there was much excitement over its release. We did get a better understanding of where Temasek wants to invest and what kind of investments they will be. But I wonder how much insight it really gives when Temasek suddenly buys and sells its assets around the region.

To dispel suspicion, the top brass of these funds probably need to engage the media more, but I doubt they will be prepared to go into the details of their investments.

I think The Economist sums it the situation best:

"If one made a bad bet and had to unwind it fast, nobody would know what was happening. No one knows how they manage risk. And although funds have tried hard to avoid buying assets that might attract the attention of politicians and voters, nobody knows how politically motivated they might become."

Sovereign Wealth Funds = SWF = Scary Wicked Force/Stable Wealthy Friend? Time will tell.