A potential rise in “investment protectionism”, where countries tighten rules around the investments of sovereign wealth funds, is a major concern for the International Monetary Fund, according to the chair of the Future Fund board, David Murray.

In response to this concern, the IMF has established an international working group of 25 sovereign wealth funds (SWFs), including the Future Fund, to develop a set of voluntary principles for SWFs to adopt, “designed to give comfort to investment recipient countries”. “That this should happen now is most interesting because the SWFs themselves have not been subject to criticism in the 53 years since the first was established by Kuwait,” Murray said. Murray told a Perth meeting of the Australian Institute of Company Directors that the consequences of countries with budgets in surplus not being able to recycle their wealth in open markets should be considered. “The cost to the global economy of a fall in allocative efficiency would be enormous. Imagine the consequences of SWFs not investing in equity and debt instruments of banks over the last nine months,” he said. The Future Fund should not be regarded as a pension fund and does not have to be mindful of the structure of superannuation liabilities in determining its investment strategy, although its asset sales proceeds will be used to meet Commonwealth unfunded super liabilities, he said. It is, like all SWFs, defined by three main factors: The availability of a government surplus not needed for normal running expenditures or liquid reserves (typically in the central bank), an economic interest in the surplus which is shared by the community as a whole and, an intergenerational or longer term purpose for investment of the funds. “If these three components are clear in the mission, structure and mandate of SWFs, then the risk of misunderstanding and rise of investment protectionism can be minimised,” he said. Murray said SWFs will always attract a lot of attention because their funds could be arguably used by the community now. It results in “substantial questioning” of their activities and investments. “A fine balance between independence and transparency is needed to deal with this – independence because politically motivated investment decisions need to be avoided, and transparency because there is always a limit to disclosure to protect market positioning.” The IMF international working group’s set of SWF principles is slated for release in October, according to the IMF’s website.

Join the discussion