What do you call a national piggy bank?...
Sovereign wealth funds are state-owned investment funds that hold and manage assets for a country or its citizens. They are typically funded by a combination of sources, including surplus government revenue, income generated by natural resources, and foreign currency reserves.
Sovereign wealth funds serve various purposes for countries that set them up. The overarching goal may be to fund public utilities such as free education in Texas, it can also be to manage the pension of citizens, like in Canada or to support infrastructure development and provide fiscal stability for the government, like in Nigeria (yes, we don't spend everything we get from oil). Whatever the reason, the fund is always used for multiple agendas. For this reason, its performance is not usually just judged by its rate of return, although this is also important.
Increasingly, sovereign wealth funds have become one of the many ways countries use their resources to drive their economic interests. They might invest in ways that give them outsized control of major companies in other countries. This control of vital companies can give the sovereign wealth fund leverage over the country where the company is located. However, to avoid this, several countries like the EU and the US have established laws to safeguard again this kind of action by foreign entities in their capital markets.
Another critical point and the main driver of establishing sovereign wealth funds by commodity-exporting countries is to save excess revenues. All commodities are cyclical in nature. This means that countries that rely on exporting commodities are going to be exposed to economic booms and busts.
To mitigate this, countries can take the extra revenues made during booms and then use it as a buffer in times of bust. This is the driving force behind sovereign wealth funds like the Nigeria Sovereign Investment Authority and the Kuwait Investment Authority. These are funds primarily funded from excess crude revenue.
To learn
Sovereign wealth funds are just one of the many ways government can invest and protect its interests and drive economic development by leveraging capital markets and responsibly managing its assets for the benefit of citizens.
The nature of these funds allow them to serve various objectives in a comprehensive and strategic way. As individuals when we are investing we must also consider our strategic goals and consult with financial advisers to map out the best ways to structure our personal finances to achieve this goal.