IMF endorses wealth fund guide plan

22/03/2008 - 2:42

By Lesley Wroughton

WASHINGTON (Reuters) - The International Monetary Fund on Friday endorsed staff plans to develop best practice guidelines for sovereign wealth funds and said it would meet with wealth funds in April to start working on an initial draft.

IMF Director of Monetary and Capital Markets Jaime Caruana said the IMF would establish an international working group of wealth funds and the April meeting would delve into technical details. Current plans are to release the first draft by October meetings of the IMF.

He said the set of best practices would not "be prescriptive code," but would help allay concerns about the increasing size of wealth funds, many of whom reveal very little about their investment strategies and assets.

"We think a better understanding of the role and practices of sovereign wealth funds and development of this set of best practices would be mutually beneficial for all the parties," Caruana told a conference call with reporters.

He also welcomed agreement on Thursday between the U.S. Treasury and Abu Dhabi and Singapore on a set of principles for wealth funds saying it would help, not hinder, the IMF's work.

"We regard this as very good inputs and will be cooperating with many parties and talking with all sovereign wealth funds. We want to work with them and if the work is facilitated by other contributions, we don't have any problem with that. On the contrary, we will be very happy," Caruana added.

The foreign-controlled funds, many based in the Middle East but also in Asia, Russia and China, have sparked concern among U.S. lawmakers because they have poured billions of dollars into Wall Street firms and other businesses and fanned fears that the U.S. was losing control of its destiny.

The IMF has estimated that sovereign wealth funds could reach $6 trillion to $10 trillion by 2013 and currently exceed the size of hedge funds.

U.S. Treasury Secretary Henry Paulson said on Thursday the U.S.-agreed principles should guide efforts by the IMF and the Organisation for Economic Cooperation and Development and would not supersede the work of the institutions.

U.S. Treasury spokeswoman Brookly Mclaughlin welcomed the IMF's actions, saying: "The U.S. welcomes sovereign wealth fund investment and applauds this as a positive step in the effort to keep the global economy open to investment flows."


Meanwhile, an IMF report said there was no clear evidence that wealth funds' investments were politically motivated.

While the U.S. agreement with Abu Dhabi and Singapore, specifies that politics should not influence their investment decisions, the IMF report said:

"It has not been evident that sovereign wealth fund governments have directly interfered with individual investment decisions of their funds or used them for political objectives."

However, the IMF said wealth fund governments do determine the overall objectives of the funds.

It also said so far wealth funds appear to be a stabilizing force but their growing size could cause market volatility.

Currently, wealth funds are not regarded as highly leveraged and there is little evidence of sudden shifts in portfolio allocations, the IMF said.

It said wealth funds typically have medium to long term investment horizons, suggesting they are less likely to make abrupt portfolio shifts which could cause market volatility.

Adnan Mazarei, assistant director in the policy and review department, said that as wealth funds become more prominent and their resources increase, they would naturally move more into equities, which could affect stock prices.

Quoting IMF analysis, Mazarei said as central banks in oil exporting countries and Asia shift growing reserves into wealth funds, they could pursue more diversified portfolios with more diversified currencies, causing changes in exchange rates.

Since reserves were mostly in U.S. dollar, it would likely affect the U.S. currency.

The fund said eliminating all concerns about wealth funds would likely to be difficult, but if left entirely unaddressed they may fuel increased protectionism.

Udaibir Das, IMF division chief in the monetary and capital markets department, said the IMF had a range of existing guidelines for things such as fiscal, monetary policy and financial transparency that could be applied to wealth funds.

Asked whether wealth funds had so far been cooperative, Das said: "The dialogue is going on and we met them officially in Washington a few months back and since then we have been in active engagement with several of them. So the answer is yes."

(Editing by Christian Wiessner)

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