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Cash-rich sovereign wealth funds from the Middle East and Asia should shake off their passive approach to investments and take a more active role in scrutinising corporate decision-making in western capital markets, according to one of the world's largest institutional investor forums.
Speaking at a conference on sovereign wealth funds in Sweden, Peter Montagnon, chairman of the International Corporate Governance Network, said: "Being purely passive is perhaps not helpful to their objectives in the long run. Using your rights as an owner is an important way of securing value.
"If you refuse to use your (shareholder) vote, the risk is you effectively end up supporting bad boards."
Montagnon, who is also investment affairs director at the Association of British Insurers, admitted the challenge was counter- intuitive for many funds. "I think we are only at the start of a journey. It is not a question of what we are doing now, but how we can end up with funds integrated in global markets in a positive and active way for the benefit of everybody."
He said singling out sovereign wealth funds for additional regulations was wrong.
The ICGN's 500 members, mostly institutional investors, manage funds totalling $15 trillion and the group's strong support for sovereign funds comes at a time of mounting concern in Washington and Brussels that a flood of foreign state-sponsored investments in the wake of the credit crunch could be inspired by political rather than financial goals.
US and European politicians have threatened legislation if these secretive operators do not become more transparent. Many hope the International Monetary Fund can broker a solution.
Also speaking in Gothenburg was Mahmoud al-Khanderi, director of the legal and compliance department at the Kuwait Investment Authority, one of a number of funds to have pumped billions of dollars into the crisis-hit US bank Citigroup since the autumn. He said his fund, which has an estimated $250 billion of assets under management and is one of the five largest in world, would consider abandoning its passive investment rule in exceptional cases.
"In those circumstances where there is an interest for the whole of shareholders that require our intervention we will intervene," he said. "But we will not side with one shareholder against another shareholder."
Gao Xiqing, general manager of the Chinese Investment Corporation, with an estimated $200 billion assets under management, said the emergence of his fund last year had triggered even greater concern in western markets about the likely impact of sovereign wealth. Economists believe CIC's coffers are likely to balloon in coming years as an increasing proportion of China's vast foreign currency reserves are poured into the fund.
