SOVEREIGN wealth funds (SWFs) - including the Government of Singapore Investment Corporation (GIC) - are feared more for what they are than for what they really do.

 

Such funds, which are owned by governments and funded by surpluses accumulated by the state, are often regarded with suspicion, especially in rich countries in Europe and America. There, such public money is typically used to build hospitals and schools, or returned to the needy - the jobless and elderly, if there's any leftover.

 

Many Europeans and Americans think it is wrong to deploy public money in the private sector; they believe politicians and civil servants know little about business or investment.

 

If politicians cross the line dividing business and politics, free-marketeers say they are bound to make a mess. Or worse - that they have dark political motives not related to making more money.

 

So, when SWFs swoop down on a corporate prey, many in the West cry foul - and see it as proof that the SWFs are taking over their industries.

 

The cry is often egged on by Western politicians looking for scapegoats to take the fall for their failure to create jobs. The SWFs don't help themselves by keeping their operations largely under wraps.

 

But the adoption in 2008 of the Santiago Principles - a set of best-practice guidelines for SWFs - may help clear the air. They call for greater transparency, clearer governance standards and sound portfolio management rules.

 

The West, which is the most wary of the rise of SWFs, is prepared to live with them - if they behave like other institutional investors.

 

But what's the big difference in practice between SWFs such as the GIC and public pension, mutual, private equity and hedge funds? They follow the same investment practices and hire from the same pool of professionals.

 

Politicians may sit on the boards of SWFs and call the shots, but they are often surrounded by professionals in the investment game who will remind them what the SWFs are for - which is, to make the most of the country's money and get the best financial returns.

 

SWFs also tend to take a longer view of investments, as a matter of strategy and because they've got greater funds at risk. Thus they are usually less speculative in placing their bets than private investment funds.

 

Some giant pension funds also take more patient positions, or at least sink a big chunk of their money in long-term assets.

 

Indeed, the very club to which those countries that are doubtful of the SWFs belong - the Organisation for Economic Co-operation and Development (OECD) - last month released a study with this conclusion: 'The fear that sovereigns (SWFs) with political motivations use their financial power to secure large stakes is shown to be unfounded.'

 

'We find that SWF investment decisions do not differ greatly from those of other wealth managers,' the study, titled Are Sovereign Welfare Funds' Investments Politically Biased?, said.

 

The study found that SWFs, like mutual funds, are almost politically blind when they invest in a country - they pay scant notice to whether it is a democracy or autocracy. As long as there is money to be made, they invest.

 

'More often than not, their (SWFs and mutual funds) asset allocation strategies converge, these being driven by a financial and not a political bias,' the study said.

 

Critics, for lack of evidence, often fall back on SWFs' penchant for secrecy to make the point that such funds harbour sinister motives.

 

The lack of transparency in most SWFs is a point the OECD study concedes - and wants the SWFs to address.

 

Yet, as the recent global financial crisis highlighted, the likes of hedge funds and private equity funds are just as secretive. At least, many of the SWFs are moving to open up to the public.

 

Transparency will be good for investors and for the funds themselves. But there should be no double standards. It should apply to all - SWFs and all other institutional investors.

 

'In a world of post-2008-financial-collapse, applying double standards is, and will be, more difficult to legitimise than in the past,' the OECD study said. 'Emerging countries, starting from China or Singapore, will have little time to be lectured by rich countries that set up a major global financial crisis.'

 

The point is, rich countries do not have a monopoly on best practices. Some emerging economies have proven they can also produce best practices - and be more virtuous in applying sound policies.

 

The Santiago Principles are also a tacit nod to the staying power of the SWFs, which have become key players in today's global financial landscape. Every move they make can shake the market.

 

The West should judge the SWFs by what they do, and not by what they are. They may well turn out to be more akin to white knights that came to the rescue of Western financial institutions during the financial crisis than to barbarians at the gate.