Revisiting Sovereign Wealth Funds
Ask A CIO #35
How big would a U.S. Sovereign Wealth Fund (SWF) need to be to really move a significant needle? For example, Norges is huge and contributes a lot to the Norwegian government budget, but their economy and government are so much smaller than that of the U.S.
And then, once you have a needle-moving AUM in mind for the U.S. (whatever that is), how do you invest in any way other than what Norges does? I know some SWFs invest a lot in alts. But if a U.S. SWF is the largest in the world, the check sizes make basically any "normal" portfolio impossible, right? Is that perhaps why the U.S. has disparate pension systems and things, and not a federal SWF?
Last week, President Trump issued an executive order to create a U.S. SWF. The details have been sparse, but the hot takes – well, those have been plentiful.
And even though I wasn’t planning to wade into the topic again, I think your questions raise fun hypotheticals. If we can just agree to ignore the question of how, exactly, a U.S. SWF gets funded in the first place, we can cover a lot of ground using precedents set by existing SWFs and other large pools of capital.
Let’s start with your first question – how big would a U.S. SWF have to be to match the relative impact of other SWFs on their home countries? Norges (NBIM), the Norwegian SWF, is a great case study. NBIM also happens to be pretty transparent in its operations, which as I’ve mentioned previously, is not universal among SWFs.
From what has been reported, NBIM has $1.8 trillion in assets.1 Norway expects to withdraw up to 3% (the fund’s expected real rate of return) from the fund each year to contribute to the government’s budget.2 At $1.8 trillion, 3% represents about $54 billion. That said, NBIM has stated that it contributes about 20% of the government budget.3
Working backwards, what if we apply similar proportions to the U.S. to estimate a size that would “move the needle?” The U.S. spent $6.75 trillion in fiscal year 2024.4 A U.S. SWF would need to contribute $1.35 trillion annually to account for 20% of the government’s budget. At a 3% spending rate, the SWF would need to be $45 trillion to deliver $1.35 trillion. These are, as you can see, comically large numbers.
But a U.S. SWF doesn’t need to contribute 20% of the annual budget to be meaningful. Maybe just meeting 5% of the government’s annual budget is impactful enough. A U.S. SWF would then only need to be about $10 trillion, which feels almost reasonable by comparison!
Ok, so we’ll settle on a $10 trillion U.S. SWF (remember, we agreed to not dwell on funding sources here). On to your next question: how might one go about investing $10 trillion?
For starters, probably not all at once. Here, I’ll look to CIC, China’s SWF. CIC was created in 2007 to invest China’s surplus foreign reserves, which totaled $1.4 trillion at the time. In its first year of operations, CIC was funded with $200 billion.5 As of 2023, CIC managed $1.3 trillion and reported a 6.2% annualized return since inception.6 Since $200 billion compounding at 6.2% return over 16 years is meaningfully less than $1.3 trillion, we can assume that the first $200 billion was not CIC’s only funding, but that it was funded in tranches.
It might be prudent for a new U.S. SWF to take a similarly measured approach. Why invest $10 trillion in one go? Why not $1 trillion a year over 10 years? Compared to $10 trillion, $1 trillion sounds downright manageable.
So now the task is to invest $1 trillion. At this scale, I agree that NBIM is again a good case study. Like NBIM, some sizable portion of our hypothetical U.S. SWF would probably, out of necessity, be invested in passive global equities and bonds.
But let’s again look to other large pools of capital for investment inspiration. Over the years, large asset owners have found increasingly creative ways to partner with private investment managers. One possible path, taken by various Middle Eastern SWFs, is to purchase passive minority equity positions in large private managers and then actively co-invest alongside those managers. Another path is to grant private managers discretion to manage specific strategies, as at least one large U.S. pension plan has done in outsourcing its venture capital program.
Of course, since we’re talking about a hypothetical national U.S. SWF, it would be reasonable to expect that some portion of the investment portfolio would be dedicated to strategic initiatives in service of national interests. Without speculating on what those initiatives might be, strategic investments, which can be domestic or international, have the potential to consume a lot of capital.7
And just to level set expectations, from what I’ve seen, many SWFs generate long-term returns in the mid-single digits. As a quick sampling, Singapore’s GIC reported a 5.8% annualized nominal rate of return for the 20-year period ending March 31, 2024.8 Norway’s NBIM reported a 6.3% annualized return from its 1998 inception through December 31, 2024.9 Abu Dhabi’s ADIA reported a 20-year annualized return of 6.4% through December 31, 2023.10 And China’s CIC, as previously noted above, generated a 6.2% annualized return from inception through December 31, 2023.
While the sheer sizes of SWFs pose investment challenges, returns are also likely lower because financial returns are just one consideration out of potentially multiple goals.
And finally, your last question: is the potentially unwieldy size of a U.S. SWF why the U.S. instead has disparate pensions systems? I definitely have no special insights here, but I’m pretty sure the various disparate public pension systems and pockets of capital across the U.S. are just the byproducts of various local interests and priorities. There are about 5,000 state and local pension systems of varying sizes across the country, which doesn’t strike me as particularly efficient or optimal either (not that my opinion matters).
In many respects, I think one big reason the U.S. doesn’t have a SWF (aside from the whole figuring out the funding part) is that there hasn’t been an urgent need for one. Many of the largest SWFs were created by countries with narrower economies or concentrated revenues from oil and gas production. SWFs provide these countries with the ability to diversify investments and reduce their economic concentration. The U.S. has the largest economy in the world, and it’s highly diversified. There’s a reason all the other SWFs invest heavily in the U.S.
Thanks for the great question! And as always, feel free to reach out: askacio@ivyinvest.co.
Before we conclude for the week, I’m going to take a moment to celebrate – Go Birds!
Until next week,
Wendy
If all other strategies have been exhausted, but excess capital remains abundant, there’s always the SoftBank approach!