The new reality of sovereign wealth fund capital 

The purpose of sovereign wealth funds is changing. From their more traditional role as stewards of their nations’ capital, sovereign wealth funds are increasingly taking on a wider remit, serving to act as a diversifier against national industries, project soft power, and even foster capital formation in domestic markets.

Sovereign wealth funds occupy a distinctive position in the global investment landscape. As some of the world’s largest limited partners, they deploy vast pools of capital, and yet their strategies are shaped not only by financial objectives but by public policy mandates and nationally defined priorities that underpin their investment philosophies. 

In recent years, governments including those of the United Kingdom, Mongolia, Ethiopia and Indonesia have turned to sovereign wealth vehicles to advance domestic policy goals. These range from industrial strategy and infrastructure development to strengthening local capital markets and stewarding national savings. Elsewhere, policymakers in the United States have been public in their ambitions to establish a similar vehicle, motivated by the prospect of long-term returns and direct investment opportunities in the US. ¹

However, grouping sovereign wealth funds as one class of investor fails to recognise the distinguishing features that make each fund differentiated – while sources of capital are often similar for each, broader strategic objectives and operating constraints can vary widely. 

For example, while commodity backed funds in parts of the Middle East and North Africa are frequently mandated to diversify economies away from reliance on resource revenues, funds in export-oriented economies may prioritise return enhancement and active portfolio management. 

Moreover, geography plays an important role in defining the objectives of a fund, as natural resources or geographical realities define investment priorities. In reflection of these differentiators, governance frameworks, risk tolerances and investment horizons vary accordingly, reflecting fiscal circumstance, political context and geographical realities.

Increasingly, sovereign wealth funds must act not just as allocators of capital, but also as attractors of capital: serving as a cornerstone investor to help shore up private capital projects in their home country, or in support of IPOs and domestic champions to improve governance standards and market depth. 

This requires expertise and capacities on top of the deep portfolio management knowledge required of any large-scale investor. We believe in a total portfolio approach for all large asset owners, but sovereign wealth funds must take a considerably wider perspective than most.

The diversity of sovereign wealth funds demands advisory relationships grounded in nuance. They require partners who understand the interplay between governance, public accountability and fiduciary duty. This can create a challenge for funds looking to enhance their capabilities. Each fund’s different constraints can make sourcing talent and establishing governance frameworks challenging. Often this is best solved by seconding advisors to work within the fund for extended periods to build bespoke operations.

At the same time, sovereign wealth funds sometimes face questions about the degree of investment autonomy and institutional sophistication within certain structures, particularly where government agencies exert direct influence over strategy or capital allocation decisions. 

Portfolio construction must be calibrated to distinct mandates, strategic objectives and risk parameters. In our view, a uniform model is insufficient for institutions whose purposes are inherently differentiated.

In a market environment defined by geopolitical uncertainty, regulatory shifts and economic dislocation, sovereign wealth funds need to continually evolve to help ensure they are building sophisticated portfolios that can help deliver on their objectives. In countries and regions where the war for talent is fiercer than ever before, this can mean leveraging delegated investment services such as OCIO. 

We believe that, in spite of the uniqueness of individual sovereign wealth funds, there is much that they can learn from one another.