With official details scant so far, speculation about the shape of a planned new US sovereign wealth fund (SWF) is broad. But if the idea does become a reality, other asset owners are likely to be affected by such a large newcomer in one way or another.
What is already known is that the US Treasury and Commerce secretaries have been instructed by US President Donald Trump to develop a plan to set up an 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”.
According to the executive order signed on 3 February, this plan must be complete by 5 May.
The White House has said the US has vast assets that could be invested via a SWF, with the federal government directly owning $5.7trn (€5.5trn) of assets, and far more indirectly, “including through natural resource reserves”.
Treasury secretary Scott Bessent said when the announcement was made, that the administration would “monetise the asset side of the US balance sheet for the American people”.
The idea has attracted some enthusiasm within the US about how the fund could help the country increase its influence abroad by buying mineral resources, stakes in ports, or telecommunications infrastructure, providing a counterbalance to Chinese state investment over recent years in foreign infrastructure and other assets.
There has also been scepticism about what the point of a US SWF would be, given the indebtedness of the federal government, with commentators arguing that any financial resources gleaned from ‘monetising’ US federal government-owned assets should rather be used to pay down national debt.
Norway might not be the model
A key question is whether the fund would be a public investment fund to pursue political or strategic objectives, in common with many such funds established by other countries, or whether it is intended to be more like the Norwegian oil fund.
Norway’s Government Pension Fund Global (GPFG) is the largest SWF in the world, and while Trump may envy its size – in particular relative to national wealth – it is unlikely this is the SWF model he has in mind.
“When Norway discovered oil, it assumed the resource wouldn’t last, so it shifted wealth from underground resources into a globally diversified index portfolio. Importantly, this is a systematic, scientific savings portfolio to smooth public and private consumption, not a discretionary investment portfolio,” explains Espen Henriksen, associate professor within BI Norwegian Business School’s department of finance.
The GPFG follows its benchmark index closely, while nevertheless seeking to outperform it to earn healthy returns.
“For the US sovereign wealth fund, such an investment strategy would be far too modest because the objectives would remain purely financial,” says Timo Löyttyniemi, CEO of the State Pension Fund (VER).
A US SWF would most likely aim higher, he says, but points to potential competition problems with the private sector, if it steered in a more strategic direction by investing in, say, commodities, defence, infrastructure or land.
“If we take the speculations one step further and consider them in view of the president’s recent statements, these operations could be carried out outside the United States, which would mean less competition with domestic businesses and even give a boost to US companies in their efforts to conquer the world and new markets,” Löyttyniemi says.
Private-sector competition
According to the outline, Trump’s idea has elements of a traditional SWF, referring, for example, to the nation’s assets, and the natural resource reserves of the federal government, and of a new-style strategic investment fund (SIF) targeting direct, shorter-term economic benefits for domestic citizens, says Georg Inderst, independent adviser to pension funds, institutional investors and international organisations.
“For the US sovereign wealth fund, such an investment strategy would be far too modest because the objectives would remain purely financial”
Timo Löyttyniemi, CEO of the State Pension Fund (VER)
The SIF idea fits into the increasing trend of policies to “establish long-term economic security” and promote US leadership, he says, along with other measures in recent years including more and more restrictive regulation on foreign direct investment.
Such SIFs have several challenges, however, according to Inderst, not least political interference and bureaucracy, or the crowding out of private investment that would otherwise have occurred anyway.
For asset owners such as pension funds and insurance companies, though, he says it can be useful to co-operate and co-invest with such strategic investment funds or national development banks for a number of reasons, including access to interesting projects, sharing of expertise, cost efficiency, possibly also access to favourable terms, such as guarantees, subsidies, and credit enhancements.
“This in particular if the public fund operates with a genuine long-term investment mindset,” Inderst adds.
Potential risks, though, can lie in an unclear or complex institutional set-up, he says, and in slow decision-making or excessive bureaucracy, in changing government directions and rules, and in diverging time frames or risk appetites between all the players involved.
Until there is more clarity on the objectives, strategy, and scale of the potential US SWF, Henriksen says it is difficult to assess its implications for existing institutional investors.
“It could compete with them in bidding for assets, but it may also operate in a completely different space, focusing instead on funding strategic projects that are currently financed through federal and state budgets,” he says.
For all the nationalistic fanfare around its creation, a new US SWF will perhaps have less of a flag-waving purpose and more of a vital and near-term role to play.
Löyttyniemi says it will underpin government finances and help control national debt – at a time when many are predicting that US federal debt is on the wrong track, with the debt-to-GDP ratio having exceeded 100%.
“The sovereign wealth fund will serve as a defence mechanism in the event of a debt crisis,” he says.
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