Once relatively esoteric, Sovereign Wealth Funds (SWFs) and other Sovereign Investment Vehicles (SIVs) are suddenly in the spotlight
Two weeks after US President Trump declared “Liberation Day”, the world’s attention remains fixed on US trade policy—how the new tariff regime is going to evolve, how other countries will respond, and what the implications are for global economic growth and financial markets. But the extraordinary events of the past two weeks have eclipsed another recent US policy that received far less attention. Following President Trump’s signing of Executive Order 14196 in early February, the US plans to create a SWF 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.”[1] More details are expected to be published in the weeks ahead.
TheCityUK recently published research on SWFs, providing insight into the global landscape for these funds and other SIVs. In ‘Sovereign Wealth Funds: Global Trends and the UK's Role in the Evolving Landscape for Sovereign Investment Vehicles’, we noted that SWF assets under management (AuM) have increased significantly over the last decade, with an average annual growth rate of 7%, growing from $6.7trn in 2014 to $12.7trn in 2023. The scale of AuM makes them a powerful investor class, particularly in equity, real estate and infrastructure.
SWFs’ role as investors is reasonably well known, particularly because of recent high-profile investments and/or disinvestments made by some of the largest SWFs, like Norway’s Government Pension Fund and the Abu Dhabi Investment Authority. But the broader landscape of SIVs, of which SWFs are a part, is less well understood. In addition to its quantitative analysis, our research made an important contribution to the current debate around SWFs by introducing a taxonomy to clarify the distinctions among various state-owned investment entities. We noted that SIVs are “government-owned investment entities that seek to generate financial returns for the nation”. Types of SIVs aside from SWFs include:
- Strategic Investment Funds (SIFs): Also known as government development funds, these funds focus on domestic economic development objectives, such as promoting industrial growth, innovation, and infrastructure development. They often invest in sectors deemed strategic for national interests.
- Public Pension Funds: These are funds established to manage the pension liabilities of public sector employees. They invest in a diversified portfolio to meet future pension obligations.
- State-Owned Enterprises (SOEs): While not investment funds per se, SOEs are government-owned or -controlled corporations that may engage in investment activities aligned with national economic policies.
In contrast to these funds, SWFs “exist to invest government funds—i.e., surpluses. In terms of funding, SWFs’ assets are commonly established out of current-account surpluses, official foreign currency operations, the proceeds of privatisations and fiscal surpluses, or receipts resulting from commodity exports.” So, although details of the forthcoming US SWF have not yet been published, the fact that the US runs large structural fiscal and current-account deficits suggests that the new fund will not be a true SWF (funded from surpluses). Instead, the stated goals suggest that the new US fund will be another type of SIV—specifically, a Strategic Investment Fund (SIF).
The US isn’t the only country to be launching a new SIV this year. In February, Indonesia launched Danantara, its second SWF (alongside the Indonesia Investment Authority). This, too, bears more resemblance to an SIF, particularly its goal of “acting as a catalyst for national economic growth by investing in key strategic sectors that drives global competitiveness”.[2]
In my foreword to our SWF research, I wrote: “In the same way that green bonds are in fact a diverse range of instruments (encompassing widely varying sizes, structures, issuer types, etc) linked only by a common (self-determined) label, so SIVs have a common feature—capitalisation (total or partial) with public funds—but are not a unitary class of instruments.” SIVs are evolving: the new crop are taking unorthodox approaches to funding and investment approaches. But nomenclature matters: the distinction among different SIVs has implications for transparency, governance, and market perception.
As we explain in our report, SWFs are typically established to manage surplus national wealth—such as proceeds from commodity exports or foreign exchange reserves—with a mandate focused on long-term macroeconomic stability. Calling a fund an SWF when it is actually intended primarily for domestic development or short-term strategic objectives risks sowing confusion—or doubt—among investors and ratings agencies. This could be infectious, casting doubt over the wider credibility of the sovereign, with negative implications for credit ratings. For this reason, our research seeks to increase understanding of these increasingly important—and increasingly numerous—investment vehicles.
[1] Federal Register :: A Plan for Establishing a United States Sovereign Wealth Fund
