Not so long ago, a third-party investment manager handling government funds caused heavy losses for Taiwan’s Labor Pension and Labor Insurance funds. Now another market trader is suspected of speculating on shares with board members of an over-the-counter listed company, causing the pension fund to lose more than NT$60 million (US$2 million).
Minister of Finance Chang Sheng-ford (張盛和) has suggested setting up a “Taiwan sovereign fund,” but nothing more has been done about it. If fund managers are inexpert and third-party traders keep mishandling the funds, establishing a sovereign fund could be a solution, since it could kill two birds with one stone by averting rogue trading and improving investment performance.
Sovereign funds are wealth funds that are owned, controlled and budgeted for by governments. They seek to maximize return on investment following risk adjustment and are managed by specialist investment bodies independent of the central bank and finance ministry.
Norway’s Government Pension Fund Global is recognized worldwide as the best-governed sovereign wealth fund. Some aspects of the Norwegian fund’s operations would be worthy references in planning for a future sovereign wealth fund for Taiwan.
First, the purpose of the fund is to provide welfare for the nation’s citizens and its basic strategy is clear. In principle, the fund’s overseas investments have no political strategic purpose and it does not gain controlling interests in the companies in which it invests. It is also stipulated that the fund may not invest in companies that act immorally, violate human rights, are involved in major corruption or badly damage the environment. The fund is not allowed to manipulate the market share price of single companies, or to hold more than 3 percent of the total shares of any one company.
Second, the Norwegian fund has established commercial, professional and independent operating principles. Its internal organizational structure, mode of governance and management team are like those of a world-class private investment firm, rather than a government administration department.
The fund enlists first-rate financial talent from around the world. Its chief investment officer and fund mangers are all externally recruited professionals. The makeup of its investment portfolio is made public periodically, as is the rate of return on its investments, and its asset flows are all listed on its Web site. This makes it much more transparent than other sovereign wealth funds.
Another notable feature is the fund’s ethical council, with a broad-based membership, including not just economists, but also philosophers, human-rights lawyers, product safety experts and experts in international law.
It must be admitted that many difficulties stand in the way of setting up a Taiwan sovereign fund.
First, existing funds are based on different laws. They serve specific groups of people, have differing regulations about charges and are answerable to different government departments. These factors will make integrating all these funds a complicated task.
Second, it will take a long time to draw up all the necessary legal amendments and new legislation.
Third, it will not be easy to find highly qualified personnel and set up an independent body or company to manage the fund’s investments, without over-concentration of power, and to make the fund’s operations completely transparent and free of political interference.
Setting up a Taiwan sovereign fund is achievable, and the successful experiences of other countries are available for reference. It can be done if the government is diligent in its planning so that the obstacles can be overcome.
Lee Wo-chiang is a professor in the Department of Banking and Finance at Tamkang University.
Translated by Julian Clegg
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