SWFs versus activism

I don't believe I've used the initials SWF yet in the brief history of this blog.

So here's a definition. Outside of the personal-ads section of a newspaper, where they of course refer to single white females, the initials SWF stand for "sovereign wealth funds," the quasi-public investment funds established by nations with revenues that exceed their operational needs.

So what? Maybe nothing. Maybe it's old-fashioned profit maximization (or its close relative, risk hedging) and nothing more. The most oil-rich nations on the map have themselves already drilled all the "easy oil." The peak is nearing -- we may already be there -- and the down slope, when the industrialized world makes the necessary and long-delayed adjustments to a new system of energy use -- could be nasty for them. The sensible use of their SWF funds is simply to prepare against that day.

One example is Dubai International Capital, which is said to have $13 billion worth of assets under management.

Still, oil peak oil schmeak. That's a lot of weight to throw around. Who, if anyone, should be worried? That is a question now coming under debate in both the "mainstream press" and here in the blogosphere. Will DIC throw its financial weight around on behalf of political goals rather than profit maximization? And, if so, at whose expense?

Meanwhile, Singapore has a couple of large SWFs, the more venerable of which is known as Tamasek. Tamasek has a substantial stake in both Merrill Lynch and Barclays.

The People's Republic of China's SWF, unsurprisingly named the China Investment Corp. assisted Morgan Stanley's balance sheet last year with a $5 billion infusion.

Indeed, the major western banks and brokerage firms that have weathered the recent crises best are precisely those that have had timely infusions from SWFs. But gratitude isn't much of a factor in these matters.

I have my own pet theory about SWFs, not a very original theory but one dear to me nonetheless. My view is that the real problem they pose is to activist investing. The notion that shareholders can and should shake things up, challenging intrenched laxy managers via proxy fights, is one that has only slowly gained ground in recent years. But what if managers can call in heavy-weight support on the scale of SWFs to squelch any possible proxy fight? Then ehy'll be able to go back to sleep again, won't they?

As a "proxy partisan," as one who thinks that proxy fights are in general a good thing, I'm wary of the passive investing model that SWFs seem in general to follow. They may become the ultimate benevolent fairy godmothers of their favored managers of their favored western corporations. And in that very quiet way they may do a good deal of harm.

I'm still thinking these things through, though.