What Are Sovereign Wealth Funds and Does the U.S. Need One?
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 511. It's titled, What Are Sovereign Wealth Funds? And Does the U.S. Need One? On February 3rd, 2025, President Donald Trump signed an executive order titled A Plan for Establishing a United States Sovereign Wealth Fund.

The order pointed out that it's the policy of the United States to maximize the stewardship of our national wealth for the sole benefit of American citizens. To this end, the federal government wants to establish a sovereign wealth fund to promote fiscal sustainability, lessen the burden of taxes on American families and small businesses, establish economic security for future generations,

and promote United States economic and strategic leadership internationally.

The next steps are for the Treasury Secretary and the Secretary of Commerce to jointly submit a plan in 90 days detailing with their recommendations for how to fund the plan, the investment strategies, the structure, and the governance model. Sovereign wealth funds are investment funds that are owned or

or controlled by a government organization. These sovereign wealth funds can be at the country level, such as the first sovereign wealth fund, the Kuwait Investment Authority, or it can be at the state level, like the Alaska Permanent Fund. Around the world, there are over 100 sovereign wealth funds. They manage over $9 trillion in assets. The

The top 10 make up 78% of assets. The largest is the Norway Government Pension Fund Global with $1.7 trillion in assets. That's followed by two Chinese-controlled sovereign wealth funds, the China Investment Corporation and the SAFE Investment Company. Combined, they have $2.3 trillion in assets. And then the

the Abu Dhabi Investment Authority and the Kuwait Investment Authority fill out the top five, each with just over a trillion dollars in assets.

Collectively, sovereign wealth funds control about 4% of investable assets in the world. That's more than hedge funds and private equity. Why do countries establish sovereign wealth funds? Well, there are a number of reasons and a number of types. Sometimes the reasons are more political and other times they're more financial. Usually it's some combination of both. The first type,

And purpose for sovereign wealth funds are what are known as economic stabilization and reserve funds. These are usually established by countries that are running big trade surpluses. So it could be a country that has large natural resources reserves and they're selling oil or other commodities and running trade surpluses. 45% of sovereign wealth funds were funded or

by natural resource reserves. These funds can be stabilizing because if the price of oil spikes, for example, a nation that's exporting huge amounts of oil is running a trade surplus, that oil is being sold in dollars, now they have a lot of dollars and they don't necessarily want to sell those dollars and buy their local currency, pushing up the value of their currency, potentially distorting their domestic economy.

because then their local currency, domestic currency, could be too strong and make other exports that are not sold in dollars less competitive. As a result, then, these nations that were running huge trade surpluses, and that includes China, Korea, the Korea Investment Corporation, they establish a sovereign wealth fund to hold these funds that are in currencies outside of the home currency, and then they invest them.

A number of those countries, the exports are being controlled by state-owned companies, especially if it's oil and gas. So that's the first reason, economic stabilization and reserve funds. And it comes out of what's going on in the macroeconomy. Generally, huge trade surpluses is generating foreign currency reserves that the nation wants to invest.

The second reason is somewhat tied to that. They're savings funds, and they're established to manage wealth for future generations. An example would be the Norwegian Sovereign Wealth Fund. It is primarily funded from oil and gas revenues, and these revenues can be so extensive that the Norwegian government can't spend it all on Norway's infrastructure.

infrastructure or services. And the idea is to take some of that revenue and invest it to benefit future generations.

The U.S. has a number of savings-like vehicles, the Texas Permanent School Fund and the Permanent University Fund. Those were established in the 19th century and they was financed from oil and gas royalties on state-owned land. The New Mexico Land Grant Permanent Fund is similar. The Alabama Trust Fund was established in 1985. That was also financed by royalties from offshore oil and

and gas production. So that's the second type and purpose as a savings vehicle, as revenue is being collected today and it's going to be invested to benefit future generations.

A third type of sovereign wealth fund is a pension reserve fund. The purpose of that is to invest money today to fund future pension benefits for retirees as part of the government pension scheme. An example of this would be the New Zealand Sovereign Wealth Fund, sometimes called the super. It's managed by the guardians of New Zealand superannuation. It's done very well for the 20th

At 20 years ending June 30th, 2024, New Zealand's super has returned 10% annualized after costs and has earned $50 billion more than what it would have earned investing in treasury bills. Defined as of its most recent annual report, June 2024 had $77 billion in assets. So that's a pension reserve investment.

sovereign wealth fund. And the final category, the fourth category, are development slash strategic funds. Their goal is to support the growth of the economy and to generate financial returns by investing in helping the national economy. An example, this would be the Irish Strategic Investment Fund. And it invests

invest in commercial endeavors within Ireland and recently launched the Infrastructure Development Plan to help finance student housing across Ireland. These development funds can also provide early stage investments in strategic industries, including green energy. So when we look at the four types of solutions,

sovereign wealth funds, the Economic Stabilization Reserve Fund that wouldn't really fit the U.S. because U.S. runs a trade deficit. It hasn't nationalized its oil industry. It's not running trade surpluses that need stabilization. It doesn't sound like the goal is a savings fund to necessarily, although perhaps investing the Social Security Trust Fund, which is over $2 trillion. So maybe there'll be some aspects of...

A savings fund, because it talked about in the executive order the idea of lessening the burden of taxes on American families and to establish economic security for future generations. Perhaps if some of Social Security got invested, it would be a type of pension reserve fund, although there was no mention that I saw that that was the intent. So it sounds like it could be more of a development strategic fund to generate higher returns.

In a fact sheet that the Trump administration released, it said President Trump has called for the creation of a sovereign wealth fund to invest in great national endeavors for the benefit of all the American people. And the fact sheet went on to point out that these sovereign wealth funds exist throughout the world and that they're mechanisms to amplify the financial return to a nation's assets.

assets and leverage those returns for strategic benefit and goals. And it says the U.S. could leverage such returns, higher returns to promote fiscal sustainability, reduce the deficit, lessen the burden of taxes, and establish long-term economic security.

Now, what sovereign wealth funds have to balance is what is their focus? Is it more political? A couple of academic papers that I'll link to said a main objective of some sovereign wealth funds is to preserve state autonomy and sovereignty through the power of finance. So there's a political element in these regulations.

Reserve funds, the economic stability funds in some ways can do that, hold this capital so it isn't impacting currency exchange rates in a negative way that can hurt the country.

Generally speaking, sovereign wealth funds have not been overly political. They have focused more on returns and they've generally been passive investors. They'll own a minority share in companies and they won't exert too much influence on decision making of the companies. But some sovereign wealth funds are more activist investors as they try to increase portfolio returns. Another

A number of sovereign wealth funds were very opportunistic during the great financial crisis and were willing to step in and commit capital to help fund bankrupt companies or keep them out of bankruptcy, particularly a number of financial entities. So it was a source of institutional capital that could step in with $9 trillion worth of capital.

Now, turning back to that fact sheet, how would a U.S. sovereign wealth fund be funded? They point out that the federal government directly holds $5.7 trillion in assets.

And then, and indirectly, it holds additional natural resource reserves. When we think about what would make up this $5.7 trillion of assets, it could be government-owned properties that maybe they're going to be sold off. Maybe it's privatizing some of the public infrastructure, highways, more tolls, selling off military assets. Perhaps it's investing some of this Social Security trust fund. It could be being more active in liberalizing

leasing or selling portions of national forest? We don't know. There'll be some plans here in 90 days or so. So we're not sure how it'll be funded. One of the big issues is how big will the sovereign wealth fund be? The largest sovereign wealth funds are over a trillion dollars. The U.S. is one of the largest economies in

in the world? Will this fund be several trillion dollars? And if so, will it be crowding out investment opportunities of other institutional investors and in ourselves as individual investors? That additional capital could raise valuations and lower returns for everyone. U.S. stock market, $62 trillion. Would that have an impact? We're not sure about that. Before we continue, let me pause and share some words from this week's sponsors.

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That fact sheet then issued by the Trump administration points to the United Kingdom recently announced their own plans for a sovereign wealth fund. And they're doing it by converting an existing fund, UK Infrastructure Fund, which was investing in infrastructure projects. And they've rebranded it the National Wealth Fund, about $28 billion in assets. And the government plans on introducing legislation to allow this wealth fund to invest in asset classes outside of infrastructure.

infrastructure. Now, what's interesting about the U.S. government is it already invests heavily in basic science initiatives that are very long-term in nature. A typical venture capital fund is only 12 years. The average investment horizon of a sovereign wealth fund based on a survey by Invesco is 11 years. One benefit of a national government is their ability to invest over very long periods of time.

There are a number of federal agencies that have funded scientific research and health research. The National Science Foundation, National Institutes of Health, the Department of Energy, the Defense Advanced Research Project Agency, DARPA. We talked about that in an episode a few months ago. NASA, U.S. Geological Survey, the National Institute of Standards and Technology.

the Agriculture Research Services under the U.S. Department of Agriculture, the Office of Naval Research and Air Force Office of Scientific Research, the Center for Disease Controls and Prevention. These are entities that are currently being funded

researching within their organization and providing grant money to academics and other companies. The Inflation Reduction Act that was passed under the Biden administration, a lot of those funds, they were investment-oriented funds, grants as part of the energy transition. And so in some ways, there's some contradictions here, which is why it'll be fascinating to see what the

The goal, what the structure, what the size of the sovereign wealth fund is, because on the one hand, there are initiatives to reduce the size of government, reduce inefficiencies, but there's also billions of dollars spent by the government already in investment-like activities. They just have very long-term time horizons. There are not so much market-based returns. And if

The U.S. government wants to switch to more market-based returns. Then that potentially crowds out an area that already has ample institutional capital. More capital going after that could lead to higher valuations and lower returns for everyone.

If we look at how a typical sovereign wealth fund is structured, they have an investment policy statement that guides how it's invested. Oftentimes, that policy statement will have targets and ranges for specific assets. The portfolios are usually diversified. There's a board or investment committee. They're run like any other institutional account, be it a pension plan or

or a university endowment. And if we look at that Invesco survey of sovereign wealth funds, here's the average allocation. About a third is in stocks, 28% in bonds, 4% in cash. And then there's about 36% in alternative investments, including 22% in illiquid alternatives. So this would be private real estate, venture capital, leveraged buyout funds. It could be other real asset funds.

There's 4% in liquid alternatives, which would be more hedge fund-like strategies. And then another 10% in direct strategic investments. Maybe they're directly investing in something. It could be an infrastructure project. So they are highly diversified.

Are sovereign wealth funds good or bad? Generally, they've been positive for the countries or states that established them. This idea of investing today for future generations is what's behind many successful foundations and endowments, this intergenerational equity. And sovereign wealth funds makes a lot of sense if you have this

these limited resources, commodities, oil and gas to spread out the benefit for future generations when that limited resource is tapped out. Makes sense to have a sovereign wealth fund to manage some of these macroeconomic factors so that if a nation is generating huge trade surpluses to keep some of those proceeds and invest them where the money was raised, including U.S. government bonds.

The rationale for a U.S. sovereign wealth fund is less clear because U.S. isn't running a trade surplus. It's running budget deficits. So where will the funds come from? Will existing tax revenue be diverted to the sovereign wealth fund or will there be additional pools of money, perhaps selling or leasing mineral rights and timber within national forests, selling off government

government buildings, perhaps like UK did, just reclassifying some pool of money, calling it the sovereign wealth fund and expanding its mandate. But the U.S. invests already in basic science. And there have been huge benefits from that that have accrued to the private sector and to the citizens of the U.S. And so in some ways it could be contradictory if the Doge committee is

cutting scientific research on one hand, and as far as I'm aware, they've not announced that. But if they do, and then we're establishing a sovereign wealth fund to supposedly invest for future generations, that's

That's already happening in terms of all these agencies that do invest. Now, could they be more efficient? I'm sure they could. So we'll see how it plays out. I'm particularly concerned if it's a huge fund investing in public markets, trying to generate additional return or investing in private markets. I don't think the public and private markets needs additional investing capital from the U.S. government.

The advantage governments have is their time horizon is much longer than that of capital markets. And so the ability to fund projects where the outcome is uncertain has been hugely beneficial to the United States and other countries, what allowed for the development of the Internet and many vaccines. So we'll see how it plays out in the months ahead as the U.S. fleshes out its plans for ASEAN.

a U.S. sovereign wealth fund. That's episode 511. Thanks for listening.

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