IMF brokers “preliminary agreement” to ‘demystify’ investment choices of world’s largest foreign wealth funds

Sources: Wall Street Journal: Foreign Funds Agree to Set of Guiding Principles

BBC News: IMF Deal on Foreign Wealth Funds

 

The International Monetary Fund (IMF) has reached a “preliminary agreement” this week with the twenty-six member countries of the International Working Group of Sovereign Wealth Funds (IWG) on a set of “guiding principles” that will be used to govern the way these funds make investments. 

 

Sovereign wealth funds (SWFs) are large sums of government money (often oil and trade profits) used by countries to invest in foreign markets, ostensibly for the sole purpose of making a profit.  SWFs have recently been a hot button issue in many wealthy countries (particularly the US and Germany) in whose economies these funds have heavily invested because of the fear that some investments may be made for political, rather than commercial motives.  A notable manifestation of this concern was the attempted buyout of UK port company P&O’s US port operations by a Dubai-owned investment fund, which was vigorously opposed by the Bush administration in 2006.  The US operations were instead sold to American company AIG.

 

The IMF and the IWG hope that the new “Generally Accepted Principles and Practices” will help ease these fears by encouraging transparency in the funds’ management and investment practices, though the SWFs are not likely to be required to disclose specific investments.  Finding the right balance of transparency is important because too much forced disclosure puts the funds at a disadvantage in the market, while too little fosters distrust amongst nations.

 

Use of the principles will remain voluntary and the IMF is not expected to create an independent monitoring agency to oversee the management of the funds.  Instead, the member countries are largely expected to police themselves.  David Murray, chairman of Australia’s SWF, believes that it will be relatively easy to spot the countries that are not following the rules simply by watching the way they operate.  Whether this voluntary set of “guiding principles” will satisfy certain governments remains to be seen.

 

The IMF expects to finalize the agreement at its next meeting in October, at which point the set of principles will be released to the public.

 

Discussion:

 Do you think this agreement will help dispel the fears some governments have about the motives behind certain funds’ investments?  Should a more compulsory set of rules be developed for governing the management and investment policies of these funds?  What are some of the potential benefits of allowing SWFs to operate relatively independently?  Do they outweigh the risks?