A bill to set up the Sarawak Sovereign Wealth Future Fund was passed by the Sarawak Legislative Assembly last November.
The new act seeks to put in place prudential mechanisms, including a Board of Guardians that will provide professional management and independent custodianship of the proposed fund, which will have an initial RM8 billion appropriation from the state consolidated fund, to be progressively increased from RM300 million to RM650 million annually.
To ensure that the fund's board is composed of so-called guardians who can act both professionally and transparently, they will be required to be apolitical. As Sarawak Premier Tan Sri Abang Johari Abang Openg said when tabling the bill, "…a person will not be eligible to be appointed as a guardian if he is, at the time of his appointment, a member of a political party or member of parliament or the legislature or local authority of any state in Malaysia".
The state government has scoured the globe to come up with best practices for emulation by the Sarawak sovereign wealth fund. Abang Johari himself had led missions to scrutinise similar funds established in Norway, Singapore and the United Kingdom. These are, of course, reputedly among the best-managed sovereign funds in the world.
It so happens that at the end of last month, it was publicly revealed that the Norwegian sovereign wealth fund, which, at US$1.2 trillion, is the world's largest, suffered a whopping US$164 billion loss in 2022, representing an unprecedented -14.1 per cent return on investment.
Also in late November last year, Singapore's Deputy Prime Minister Lawrence Wong described the US$275 million write-off by its state sovereign wealth fund, Temasek Holdings, from investment in the collapsed FTX cryptocurrency business as "reputational damage", a rare comeuppance in the tightly run city-state.
What these investment losses by two of the world's best-run sovereign wealth funds tell us is that no matter how well-managed, investments are never foolproof and subject to the vagaries and volatility of global market and economic conditions.
If such examples of salting away hard-earned state reserves into investment funds are not sobering enough, there is the case of investments by the Sarawak State Financial Secretary Inc in one-time stock market darling, Serba Dinamik Berhad, that have turned disastrously wrong after a string of scandalous revelations.
To be sure, this is not an argument against the noble and laudatory aims of the Sarawak government in setting up its own sovereign fund. Rather, it is a call to be cognisant of the inherent risks associated with such funds, no matter how well-managed they may be.
Above all, this is a cautionary tale against any inclination to put the state's proverbial eggs in one basket. Besides, some eminently sensible economists have even argued that developing states such as Sarawak are serving the better public good by prioritising public expenditures on truly productive activities rather than keeping revenues in reserves and making passive investments.
An industry veteran observes that sovereign wealth funds often mitigate some investment risks by investing in funds with repeated track records of performance. He suggests challenging the Sarawak sovereign fund to seed local Sarawak fund managers with proven track records. This will also be an opportunity for Sarawak to develop its own financial ecosystem right on its doorstep.
"Traditionally, sovereign wealth funds have not been able to attract the crème de la crème of managers vis-à-vis private-sector funds such as BlackRock and Carlyle," noted the veteran.
"A performing fund manager comes even before governance matters for sovereign wealth funds. Good governance promises cannot be applied without a decent fund manager."
Setting up Sarawak's own sovereign wealth fund may be the easy part. The challenge will be how this small and new fund competes for the best fund-management talent.
The writer views developments in the nation, region and wider world from his vantage point in Kuching
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times