Transparency in investments is a motherhood-type goal, universally considered good for all involved. This is at least open to some analysis.
Over the past year sovereign wealth funds (SWFs) have captured the minds, if not hearts, of politicians, economists and funds managers as they emerge to change the political, financial and investment landscape of the world. Actually, they have probably captured the hearts of funds managers too, who will be big beneficiaries of their investment strategies.
What they have been criticized for has tended to be political, questioning their motivations for various proposed investments. Critics say they are not transparent, at least as far as their intentions go. In an interview last month with the US ‘60 Minutes’ television program, the newest and most politically watched SWF, the $US200 billion China Investment Corporation (CIC), indicated that it would become as transparent as the best fund of its kind in the world.
Right now, it is far from it, however the CIC was only formed last August and was scheduled to appoint its first asset consultants as this magazine went to press. The Sovereign Wealth Fund Institute of the US, a not-for-profit organisation formed last year to provide research and information about SWFs around the world, has come up with a ‘transparency index’ whereby it assesses the universe of 42 SWFs on a range of criteria.
On this index, Australia’s own Future Fund rates very well, coming second only to the Government Pension Fund of Norway for transparency as at March this year. The chart shows transparency and passive/active axes with not much link between the two. The Linaburg-Maduell transparency index, named after the institute’s founders, Carl Linaburg and Michael Maduell, looks at 10 ‘principles’ which the researchers say go to make up transparency. They are not particularly demanding criteria. The principles are that the fund:
- Provides history including reason for creation, origins of wealth and government ownership structure
- Provides independently audited annual reports . provides ownership percentages of company holdings, financial returns and geographic locations of holdings
- Provides size, if applicable, composition and return of foreign exchange reserves
- Provides guidelines in reference to ethical standards, investment policies, remuneration policies and ‘enforcer’ of guidelines
- Provides clear strategies and objectives
- Clearly identifies, if applicable, subsidiaries and contact information
- Identifies external managers, if applicable
- Manages its own web site . provides main office location address and contact information such as telephone and fax.
The web site for China’s CIC was criticized by the ‘60 Minutes’ reporter as being little more than a home page which requested information from people interested in applying for a job there. Does it matter whether an SWF has an informative web site? Does it matter, even, whether an SWF provides detailed information on its operations to anyone but its owners?
According to the institute’s own web site (which is well worth a look: www.swfinstitute.org) these funds have been typically established with the simple goal to make money. Most, unlike our Future Fund, do not have clear liabilities to be at least matched by a certain date. Even with the Future Fund, the liability by 2020 is so readily matched that the Government has been seen to set a different agenda which the Future Fund guardians have interpreted to mean chasing higher returns over rolling 10-year periods than the average super fund.
So, is there a link between transparency and returns? In pushing for greater transparency by the world’s SWFs, are we expecting them to do better or worse by the goals set out in their own constitutions? It would not surprise if we thought that greater transparency meant they were doing better for themselves. It would also not surprise if that is completely wrong. In the absence of any research on the subject, I can happily assert that I believe that there is more likely to be an inverse correlation between transparency and returns than a positive one.
As is well known by anyone who operates in the markets, it is important to keep one’s intentions to oneself. Insider trading, front-running and, even, momentum investing are great ways to make money at other people’s expense. If you look at the most successful funds of the past 20 years – the US endowment funds – you will not see uniform models of transparency. For starters, most invested very early in the less-transparent world of unlisted investments. And, while they have had to compete on an annual-return basis with rival institutions, they have had little or no incentive to advertise how they did it.
The SWF Institute principles do not, of course, call for any revelation of a fund’s investment intentions. But when you are dealing with such large sums of money, these funds are exploring new asset classes, not just individual investments, and first-mover advantage is, well, an advantage. The concerns of politicians are, sadly, not closely linked to the concerns of market participants.
While the French and Southern US politicians are among the most protectionist and fearful in the world, all politicians seem to be wary about the possible activities of some SWFs. Whether or not this is a good thing is more philosophical than economic or financial. Politicians are used to calling for better transparency – usually from their opponents – as are the regulators who report to them. But the people who make investments happen, which in the West is the institutional investment professionals, should not necessarily follow this call. An analogous discussion, which seems to arise at most industry conferences, is whether super funds should have crediting rates or unit pricing, and, if they have unit pricing, should this be done daily, weekly or monthly?
At this year’s CMSF, one trustee suggested in a plenary session that it may be in members’ interests to price a fund only once a quarter. The suggestion drew shakes of heads around the auditorium, but it is neither silly nor a backward step, necessarily.
The media generally regards more, and more frequent, information as better than less. But if the additional information is not really new (i.e. it is not really information) and, in fact, may lead to adverse decisions being made by members, should it be provided so frequently? Remember the heyday of hedge funds?
A few years ago they eschewed transparency and basked in the glory of great returns. Is it coincidental that returns have come back as the cries for greater transparency have increased? Maybe, maybe not.