Investors talk to sovereign wealth funds

Major institutional investors plan to urge the sovereign wealth funds (SWF) that have propped up the world's banking system to be transparent in their activities and conscientious shareholders.

The international investment community is planning to meet some of the leading sovereign wealth funds next month to discuss their investment strategies and their attitudes to key corporate governance issues regarding such matters as boardroom structure and executive pay.

Their initiative comes amid mounting concern about the increasing financial muscle of the sovereign wealth funds, so called because they manage countries' investments. In recent months they have snapped up $25bn (£12.7bn) of shares in major investment banks that have been wounded by the credit crunch. But very little is known about the motivation of these funds, which are often built on oil reserves and usually based in Asia. They are estimated to manage $2tn-$3tn globally and among the most active are the Kuwait Investment Authority, Singapore's Tamasek and the China Investment Corporation.

State-owned companies have also been demonstrating their financial capabilities. The Chinese-owned aluminium company Chinalco recently bought a 12% stake in Rio Tinto and the Qatar-backed Delta Two company was involved in an ill-fated takeover of supermarket group J Sainsbury last year.

The concern about SWF was underlined at the weekend when the Australian government said it is to study more closely investments into the country from funds owned by foreign governments. A statement from the Australian treasurer's office said: "Foreign governments may not operate solely in accordance with normal commercial considerations and may instead pursue broader political or strategic objectives".

Several other countries have voiced similar concerns. Last week, Dutch officials said the government should exercise more oversight over sovereign wealth funds, and France has expressed concern about the motivation of sovereign wealth funds and has pledged to protect local businesses from their investments.

The US Senate's banking committee said it was also looking into the effects that sovereign funds have on the US economy and financial security.

The investors, who will meet through the International Corporate Governance Network, are not expected to back calls from some politicians and bankers for a new regulatory regime for sovereign wealth funds. Instead they will urge the sovereign wealth funds to be transparent in their motivations.

Peter Montagnon, chairman of the ICGN, said sovereign wealth funds could do one of three things: be passive, politically motivated, or be conscientious investors. He urged them to be the latter

Montagnon is also head of investment affairs at the Association of British Insurers, whose members control a fifth of the shares traded on the London stockmarket.

The meeting in Gothenburg next month will be attended by institutional investors from major investment houses around the world as well as key sovereign wealth funds. Among those expected to attend are the China Investment Corporation and the Kuwait Investment Authority

Investors are thought to believe that existing rules for the markets, particularly competition rules governing monopolies, should be sufficient to ensure sovereign wealth funds should not be able to wield too much influence.

However, they are keen to encourage transparency and full disclosure of shareholdings. Karina Litvack, head of governance at F&C, said: "We advocate disclosure and feel there is a case for funds not to be passive."

The International Monetary Fund is keen to draw up disclosure ideas for sovereign wealth funds and is working with Singapore, Norway and Abu Dhabi, three states with active funds, to devise some plans.