Kudos to Mumtalakat for Choosing the Right Path

A recent article in the Financial Times discussed Mumtalakat's effort to open its books. The article praises the transparency, but also warns of the possible dangers Mumtalakat may face as a result of opening its books.

This article is directly related to my previous article on the Gulf sovereign wealth funds and their need for transparency. Despite the risks detailed by FT's article, the long-term effects of transparency can only be positive. The author of the article mentions the fact that Mumtalakat announced that it has incurred a loss last year as one of the risks that transparency brings. However, knowing the amount of loss and the decrease in the value of Mumtalakat's assets is highly preferable to the wild guesses about the performance of other swfs.

Furthermore, transparency bring accountability, which, in turn, guards against repeating mistakes. So kudos to Mumtalakat for its brave act. I expect that it will be the best performing Gulf-area swf in no time.

The Arab Sovereign Wealth Funds and the Need for Transparency

The recent global financial crisis has taken a major toll on the institutional investors, especially different sovereign wealth funds (SWFs) including those in the Arabian Gulf area. However, that impact is not clear because of the lack of transparency in these funds, which denies these SWFs the benefits accountability and frustrates institutional learning.

Because the investment process is not clear, there isn't much accountability when it comes to bad investments. For example, investing in the financial sector in the US at the end of 2007 was disastrous for most SWFs, yet no one was held accountable for deciding to jump into companies like Citigroup and Merrill Lynch when the value of their stocks was about to collapse.

Another effect of the lack of transparency is that it thwarts any possible institutional learning. The secretive nature of organziations is not usually limited to their dealings with the outside world; it extends to their internal mechanisms. This means that when a bad investment is made, no review is conducted and the causes of the failure are not documented in the SWF's knowledge base. New fund managers are not aware of earlier mistakes and tend to repeat them.

The recent news of equity investments by Arab SWFs in Western companies show that the lessons of the major losses of 2008 and 2009 have indeed been lost. In fact, many of these investments seem to be motivated by hindsight: bargain hunting by looking at historic values rather than looking at the expected future values of companies. However, without transparency no one will be able to evaluate these investments accurately and mistakes will repeat themselves indefinitely.

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