304 PA R T I I I FYI Financial Institutions Sovereign Wealth Funds: Are They a Danger? Sovereign wealth funds have been around a long time: The first, the Kuwait Investment Authority, was established in 1953 When governments accumulate a substantial amount of foreign exchange earnings, as has happened in oil-rich countries, they often recognize that these earnings would be better put into investments in foreign countries rather than kept at home The largest sovereign wealth funds are the Abu Dhabi Investment Authority, Government Pension Fund of Norway, Government of Singapore Investment Corporation, Kuwait Investment Authority, China Investment Corporation, the Stabilization Fund of the Russian Federation, and Singapore s Temasek Holdings Canada s Alberta Heritage Savings Trust Fund, established in 1976, is a small fund with about $20 billion of assets under management In 2007, there were about 40 sovereign wealth funds with estimated assets under management between $2.5 trillion and $3.5 trillion, representing about 2.5% of global assets.* Up until recently these funds have been relatively uncontroversial because they were comparatively small and primarily invested in government bonds issued by industrialized countries In recent years, however, they have grown in size they now hold over $3 trillion in assets and, in the search for higher returns, invest in a much broader set of assets This shift in size and focus has led to serious concerns about them in industrialized countries One concern is that as the size of these funds increases, they may play a more important role in asset markets, and since some of them are very large (the Abu Dhabi fund has close to $1 trillion of assets) the decision of one fund to pull out of a particular asset market could cause market instability Sovereign wealth funds also raise national security issues, because they might use their investments for political purposes They might buy up strategically important industries or use their clout to get political concessions This is a particular concern, because the governments of Russia, China, and Arab countries control many of the largest of these funds A third concern is that many of these funds, with the exception of the Norwegian fund, provide very little information about their operations and the assets in which they invest Although sovereign wealth funds pose some dangers, they are probably overplayed Xenophobia often plays well in politics, and foreign purchase of domestic assets is often prevented under the banner of national security in order to protect domestic companies from unwanted takeovers The lack of transparency for some of these large funds is a serious problem, however This is why organizations like the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) proposed rules to increase the amount of information these funds disclose to the markets *For more details on sovereign wealth funds see Tamara Gomes, The Impact of Sovereign Wealth Funds on the International Financial System, Bank of Canada Financial System Review (June 2008): 41 44 The industry also has a national association, the Investment Funds Institute of Canada (IFIC) The IFIC, however, has no regulatory role; its main function is to reflect the industry s concerns and to distribute information regarding the industry The Investment Dealers Association of Canada (IDA), the Mutual Funds Dealers Association of Canada (MFDA), established in 2000, and the stock exchanges are the self-regulatory organizations for the distribution end of the mutual funds industry