IMF Says Sovereign Wealth Funds Must Review Investment Objectives

(January 28, 2011) — The International Monetary Fund has asserted that during the financial crisis, some sovereign wealth funds changed their asset allocations in ways that may not have been ideal or justified, urging a review of investment objectives.

In a report posted on the firm’s website, the organization noted that sovereign wealth funds have a strong capacity to stabilize international capital markets due to their enormous size and long-term investing approach. The report asserted that in response to the global crisis, funds reacted by increasing liquidity, taking on additional risk, or adding new roles to their traditional mandates.

The document, by Peter Kunzel, Yinqiu Lu, Iva Petrova and Jukka Pihlman of the IMF’s monetary and capital markets department, urged sovereign wealth funds to reexamine their communications, reserve adequacy, and liquidity policies. According to the IMF, sovereign wealth fund losses during the financial crisis have sparked domestic debates on SWFs’ investment strategies. “Some have been criticized for entering the equity market at the wrong time, some blamed for a lack of insight for investing in financial institutions at the early stage of the crisis and suffering heavy losses, and others reproached for investing abroad when their support for domestic markets was highly needed,” the report stated. “These criticisms have put SWFs’ investment outlooks and strategies under increased scrutiny and their managers under pressure to avoid further losses.”

The IMF’s research also explained that the crisis impacted sovereign wealth funds’ asset allocations in varied ways. While the Alaska Permanent Fund and Ireland’s National Pension Reserve Fund increased their share of cash holdings, Norway and the Australian Government Future Fund increased their equity investments. Some funds, such as Singapore’s Temasek Holdings, shifted their investments geographically.

To see the full report by the IMF, click here.