Selwyn Parker on the growth of sovereign funds

LIKE it or not, there is no British equivalent to Tony Tan. He is the right-hand man of Singapore's former prime minister, Lee Kuan Yew, as well as deputy chairman of the highly secretive Government Investment Corporation (GIC).

The GIC is one of the most active of the new wave of sovereign wealth funds (SWF), giant government investment schemes that will at their present rate of growth become the world's dominant investors.

In the past two months alone, 68-year-old Tan has splashed well over £10 billion on buying up large chunks of banks in Wall Street and Zurich to follow the £1bn that Temasek, another Singapore SWF, paid for a stake in Barclays last year.

And why might we hear more of Mr Tan? At his disposal is at least another $330bn (£169bn) that he is anxious to spend, especially as the price of assets falls in the wake of the credit crunch. GIC may in fact already have made substantial investments in Britain that we do not know about, because there are no rules for disclosure for SWFs, at least for now.

Germany is also bumping up against Singapore's funds, to the consternation of chancellor Angela Merkel, who is nervous of the SWFs' unbridled buying power. Temasek has just started negotiating with Tui, the Hanover-based travel and container shipping group, over a 20%-plus shareholding that would create a container shipping giant to rival Denmark's Maersk. If that happens, it means one of Germany's biggest companies will revert to partial state ownership. Foreign-state ownership, that is. Because sovereign funds are managed by governments, they have the power to reverse 20 years of privatisation.

They certainly have the money. At the moment the SWFs have north of $2.5 trillion (£1.3trn) to play with. Even Warren Buffett, second-richest man in the world, who is trying to invest $50bn (£25.8bn) on behalf of his Berkshire Hathaway investment company, would agree this is quite a lot to have in one's war chest.

But that is only at the moment. At the current rate of growth, they could have $12trn (£6.2trn) within five years, by the reckoning of Morgan Stanley, and $27.2trn (£14trn) within 15 years. That is equal to more than half the value of all the world's shares at current prices.

And since the top five funds account for some 70% of the SWFs' entire value, it would mean, all things being equal, that five countries could own most of the world's listed companies if they so wished. Hardly surprising, therefore, that economist Eckart Woertz warns: "A spectre is haunting international financial markets - the spectre of sovereign wealth funds buying up Western assets."

The sovereign funds have come over the hill very fast. Although they have existed since the 1950s, they are now worth 40 times more than they were in 1990, according to the International Monetary Fund (IMF). There are at least 20, with more on the way. One of the longest-established in Europe is Norway's, which as an index investor owns a piece of every listed company in Britain, among 7000 other investments. "Our starting point was to create a tool for managing our petroleum wealth wisely," Thomas Ekeli, the fund's investment director in asset management, told the Sunday Herald.

In North America, Canada and even the state of Alaska run their own SWFs. About a third of all SWF assets belong to Asian and Pacific countries, notably China, Singapore and Australia. India is reportedly creating one. Russia is rapidly accumulating a giant-sized fund with a deceptively harmless name, the Future Generation Fund, but which has already declared intentions to seek a stranglehold on energy resources within Europe.

By far the wealthiest funds, however, are those that have prospered mightily on the back of petrodollars, as in the Middle East and Russia. The Gulf Co-Operative Council alone, representing Saudi Arabia, the Emirates, Kuwait, Oman, Qatar and Bahrain, has foreign assets worth about $1.6trn (£800bn). Even France is cobbling a fund together for defensive purposes, to protect its "champion industries" rather than for foreign investment.

In total contrast, Britain not only has no sovereign fund but seems uninterested in creating one, on the grounds that "The government's focus is on providing a framework that encourages and supports enterprise and investment in the UK economy," the Treasury informed the Sunday Herald.

This does not tell us much, if anything. Every country, including those with sovereign funds, is all for enterprise and investment, but some also see the need for a concerted and strategic national investment programme outside their own borders. But first, a nation has to be able to save. China and Singapore, for instance, are among the hardest-saving nations on earth. And the Middle East states have so much money they cannot spend it all at home.

"Should the UK be saving more?", asks Dr Martin Weale, director of the National Institute of Economic and Social Research in London. "Probably. Then we could talk about a sovereign wealth fund. At the moment the case for having one is very weak".

While Britain goes without, there is plenty of concern in Brussels. The EU has launched an inquiry into whether non-EU sovereign wealth funds (by far the majority) could deploy their vast resources to destabilise Europe's single market. Chancellor Merkel is ahead of Brussels; she is already looking at ways of making it harder for SWFs to take over German companies regarded as strategic. You can bet the midnight oil is burning in Bonn over Temasek's interest in Tui.

There is enough worry about these funds for a debate to have started about whether they should be subject to new rules. Tan said last month that his country's GIC fund was "leading the discussions" with the IMF about such rules. That may be a diplomatic decision, because the IMF signalled plans to devise guidelines for SWFs on the basis that a nation state should at least know who is buying up its economy. As a senior US economist says, undercover investment of this sort could be a "potentially powerful tool of asymmetric warfare".

Some hold up Norway's fund as a model for how all SWFs should be in future. Called the Government Pension Fund - Global, it was started in the 1990s as a way of investing the profits from North Sea energy around the world to meet future pension obligations. The fund, regarded as a model of the species for openness and good governance, is now worth just under £200bn, or roughly two years' spending on the NHS.

It publishes full details of its activities and exists purely for financial rather than empire-building reasons. "Financial investment is enshrined in our thinking," says Ekeli. "We are much more of a passive investor. We like a dialogue with companies but we don't invest to split up or to merge them. And transparency is good for us."

In Britain, the Treasury seems to agree that this is the way forward. It welcomes the IMF's moves to establish guidelines on the grounds that it will "identify best practice in such areas as institutional structure, risk management, transparency and accountability".

Japan is one country taking a harder line. Last week it called for a "global rule book". "Some countries are using their state funds to dominate certain industries," warned the president of the Iron and Steel Federation, Hajime Bada. The particular target of his ire was one the two sovereign funds considered the most menacing - China Investment Corporation, which is making a move for Rio Tinto (see article opposite). With Russia's Future Generation Fund the other fund of concern, Western and Eastern nations alike are nervous of their figurehead companies being used for foreign political gain.

As the debate about their transparency and motives intensifies, the SWFs look set to be a key flashpoint between politics and economics for some time to come.