Wealth funds adopt draft guidelines for investment

SANTIAGO/WASHINGTON (Reuters) - Global sovereign wealth funds said on Tuesday they had reached a preliminary agreement on a set of voluntary principles to guide their investment practices and to calm fears about their motives.

The International Working Group of Sovereign Wealth Funds, or IWG, which consists of 26 of the wealthy state-owned funds, said it would present the guidelines to the International Monetary Fund's policy-setting committee on October 11.

The guidelines are expected to be published after the October meeting, giving governments with sovereign wealth funds (SWFs) time to consider them first.

"The IWG has reached a preliminary agreement on a set of voluntary generally accepted principles and practices," the group said in a statement after a two-day meeting in Chile's capital, Santiago.

"These principles and practices will promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system," the group said.

The group was co-chaired by Hamad al Suwaidi, undersecretary of the Abu Dhabi finance department and a director of the Abu Dhabi Investment Authority, and Jaime Caruana, director of the IMF's monetary and capital markets division.

Sovereign funds have existed since the 1950s, but as large Asian exporting countries and oil-producing nations have seen their currency reserves balloon, these funds have mushroomed in size and number. Today the funds are believed to control assets worth between $2 trillion and $3 trillion.

Some countries where the funds invest, like the United States, are worried that funds seen controlling $10 trillion in assets between them by 2012 could be a destabilizing factor in international markets with their large-scale investments.

The United States has said it is important to ensure investments by sovereign funds are guided by commercial, not political, interests.

COMFORT TO INVESTORS

David Murray, board chairman of Australia's Future Fund, said the group agreed it needed to take some steps that would offer countries in which they invest comfort about their investments, while also ensuring investor confidentiality.

"In essence, the group believes that even though we're an investor like other investors, there is an aspect of public responsibility in our work," Murray said. "On the other hand, sovereign wealth funds have to compete in the market."

"Disclosure is important but as with any other institutional investor, there must be a limit which protects confidentiality of dealings for sovereign wealth funds and their counterparties," he added.

He said the wealth funds also agreed to consider creating a standing group of wealth funds, which would facilitate further discussion among the funds, and recipient countries, and the private sector.

"We agree that one of the benefits of having such a group would be to ... understand the application of the (guidelines) and if necessary to review it, to maintain a lot of dialogue among sovereign wealth funds about current issues that would be of value to us and to recipient countries," he told a conference call.

The guidelines include a set of 24 principles that cover legal, institutional, governance, investment policies and risk management structures of the funds, Murray said.

"By describing the legal framework and purpose of the wealth fund, recipient countries and others in the investment markets can get a very good idea of the type of investors they will meet in the market," he said.

"The governance and accountability arrangements give considerable comfort especially in the area of separation of operations of the sovereign wealth fund from its owner."

Murray said laying out investment and risk management policies will show that sovereign wealth funds act are driven by commercial and not other interests.

(Writing by Lesley Wroughton and Tim Ahmann; Editing by Leslie Adler and Braden Reddall)