Jun 02, 2018 News
By Kiana Wilburg
Most Sovereign Wealth Funds (SWF) require an investment policy; a set of guidelines, which govern how the moneys being held will be used while taking into account, the risks involved. But this is not a decision for the government to make on its own.
According to the International Monetary Fund (IMF), the Administration of the day must consult with the Parliament, citizens and non-government organizations on this matter. The Fund said in one of its reports that this is necessary to reduce the risk of unilateral decisions by any single party.
The IMF also stated that while governance models may differ due to differences in political institutions, there are some common principles that must be considered essential to any well-governed SWF.
Apart from consultations on the investment policy, the Fund said that the starting point in establishing the governance structure of an SWF should be to recognize that the bodies established to manage the assets of the SWF are essentially trustees on behalf of the people.
The Fund said that one fundamental concern is, therefore, to establish a structure that will underpin the legitimacy of the SWF’s operations and ensure that the decisions taken in the management of the SWF reflect the best interests of the people.
The IMF said that this requires a solid legal basis for the SWF and the establishment of a chain of governing bodies from the legislature down to the individual asset managers with accountability at every level.
The Fund stressed that there must be a clear and transparent division of roles and responsibilities between the different governing bodies. It said that this is a necessary condition for achieving accountability and legal certainty.
The Fund said, “When the role of a particular body is unclear, it will not be possible to hold it to account. Both gaps and overlaps in duties and responsibilities must be avoided. Overlaps give unclear division of responsibilities and undermine accountability.
“Gaps in regulations may create room for unchecked and unwanted risk taking. There must be appropriate delegation of investment decisions from the owner to the asset manager and within the management organization.”
It continued, “Asset management is highly skill-intensive, and proper delegation to a professional staff is required for successful implementation of the SWFs investment strategies. Delegation also serves to focus the attention of each governing body to the issues that are critical for success at their level in the governance system.
“Too little delegation will risk overwhelming the top bodies of the system with operational issues that will distract from higher-level strategic issues.”
The IMF added, “While a sound and robust strategy is necessary for successful management of the SWF, there must also be flexibility in the implementation of strategy to deal with changing market conditions. In many cases, this will require faster decision making processes than a highly centralized system can provide.”
At the same time, the International Monetary Fund said that the governance structure must allow the owner to determine the appropriate aggregate level of risk. While investment professionals can make qualified statements about the relationship between risk and expected return in financial markets, the Fund said that the financial theory in itself cannot provide a definitive answer on the appropriate level of risk for a SWF.
It said that this level depends also on the level of risk aversion of the ultimate beneficiaries of the SWF––the people.
The Fund asserted that the implication of this is that the level of risk in the SWF should be set by a process that allows political bodies like the Parliament and/or the Ministry of Finance to establish at least a broad guideline for the appropriate level of risk for the SWFs investments.
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