Inside Canada’s new $25B sovereign wealth fund

What is a sovereign wealth fund?

A sovereign wealth fund is a state-owned investment vehicle. The standard objective is to invest wisely in assets, such as stocks, bonds, and real estate, and earn a good rate of return to grow the fund and bolster public finances. The idea has been around for a long time, although these funds really took off in the 1990s. There are now more than 100 sovereign wealth funds in the world that hold upward of $10 trillion in assets, according to The International Forum of Sovereign Wealth Funds.

Some countries have several, and just last year President Donald Trump ordered the creation of a federal U.S.-owned fund.

Paul Calluzzo, an associate professor at the Smith School of Business, said sovereign wealth funds often operate a lot like households using excess cash to invest. “The idea is that if you invest responsibly as well, you can have a lot more money down the line than if you just spent it today,” he said. “You can also spread out that windfall over time, so that future generations can also benefit.”

But Calluzzo said the Canadian government’s objective is to make the economy more resilient. “Creating more resilience might be investing not internationally, but domestically, in a way that makes the Canadian industry more self-sufficient and more independent,” he said.

Norway’s sovereign wealth fund has grown into the world’s largest, valued at roughly $2 trillion. It took revenue from North Sea oil production and invested it outside the country in financial assets such as bonds and equity stakes.

Some sovereign wealth funds also have secondary goals beyond generating returns. Persian Gulf states use their sovereign funds to diversify outside of the fossil fuel industry, insulating them from economic developments such as oil price swings. Norway’s fund supports its national pension system.

What do they typically invest in?

Jordan Eizenga, who leads Deloitte Canada’s infrastructure and real estate practice, said which sectors a sovereign wealth fund will invest in depends on the state’s overall goals and strategy. “You could invest in renewable power, you could invest in parts of the defence supply chain, you could invest in aviation—you can invest in anything that the country or the board deems to be in its strategic interest,” he said. 

Canada’s new fund will be managed by a Crown corporation that will invest in “strategic” domestic projects—in areas such as advanced manufacturing, energy, and mining—along with companies, according to a government background document. Ottawa will consult Canadians over the coming months on specific aspects of the fund, Carney said on Monday, adding that the overall goal will be to “grow wealth for Canadians over the long term.”

Calluzzo said sovereign wealth funds often invest in many of the same companies as individuals. “Norway has a small stake in almost every publicly traded company in the world. So, really spreading it out into public financial markets, but they’re not limited to public markets,” Calluzzo said. “They can also invest in private markets through things like private equity or private credit, or through direct infrastructure investments, which is more similar to what the Canadian fund looks like it’s aiming to do.”

How are they funded? 

Capital for sovereign wealth funds is often drawn from dedicated revenue streams, such as natural resource wealth. They can also be supported by surpluses from foreign exchanges.

Carney said the federal government will put up an initial $25 billion in public funds over three years to invest in domestic projects, alongside private investors. The prime minister said individual Canadians can invest in the fund, suggesting it would be similar to purchasing a government bond, where the initial investment is protected.

How does this fund differ from funds like CPP Investments or Caisse?

Calluzzo said there are some key differences to investment vehicles such as the Canada Pension Plan Investment Board and Quebec’s public pension fund manager, the Caisse de dépôt et placement du Québec.

The CPP and La Caisse are pensions with defined benefits and contractual obligations to pay their beneficiaries. The new Canadian sovereign wealth fund also has a specific mandate to invest in domestic projects. But CPP and La Caisse have fiduciary responsibilities that push them to diversify globally.

Eizenga said it is best to think of a sovereign wealth fund as having two goals: one to seek returns, and the other being economic development. The CPP has a goal of obtaining the best risk-adjusted return for pensioners, while La Caisse has a mandate involving the development of the Quebec economy.

“The way a sovereign wealth fund would differ from CPPIB is it would have additional goals,” Eizenga said. “Those goals could be about enhancing the productive capacity of Canada, developing specific industries, ensuring sovereignty, maybe driving key industries that would make us more secure for the future.”

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