State-Run Investment Funds Don’t Tend to Perform Well Even as Trump Creates One

The Norges Bank Investment Management runs Norway’s Oil Fund. (Fredrik Solstad/Bloomberg)

With its 10% stake in Intel, and covetous glances at other chip makers and defense firms, President Donald Trump’s administration seems on its way to having an accidental sovereign-wealth fund. The results of such funds around the world aren’t encouraging.

“When President Trump talks about how sovereign-wealth funds allow other countries to exercise control over their economies, he sounds wistful and almost envious,” says Veljko Fotak, a finance professor at the University of Buffalo’s School of Management.

Fotak has spent years studying sovereign-wealth funds. He and others find that most funds are indifferent investors and bad at driving development and innovation.

Norway and Singapore are happy exceptions, thanks to their insulation from political interference. To emulate them, the Trump administration would have to check its tendencies to exert control.

A February proposal by the White House for a true sovereign-wealth fund was shelved. But now the government has deals for a 15% stake in the rare earth magnet firm MP Materials , and a 9.9% stake in Intel. It will get 15% of Nvidia and Advanced Micro Devices chip sales in China. Administration officials said they are thinking about demanding equity from other chip makers who won grants under the $39 billion CHIPS and Science Act of 2022.

Then Tuesday morning, Commerce Secretary Howard Lutnick said the government may take stakes in defense firms like Lockheed Martin , which get most of their revenue from government contracts. The Commerce Department didn’t respond to our queries, while Lockheed told my colleague Al Root that it is “continuing our strong working relationship with President Trump and his Administration to strengthen our national defense.”

So far, Trump is assembling a concentrated portfolio in just a couple of industries. Still, it has the makings of a decentralized sovereign-wealth fund, says Fotak.

Over 100 nations have some form of sovereign-wealth fund, adding up to more than $9 trillion. Nearly half are funded by revenues from natural resources like oil. Many are designed to keep their country’s trade surplus from swamping the local economy, while investing for future times when the oil runs out. Other national funds focus on development.

Most of these countries have government and trading surpluses to fund their investments. The U.S. has deficits in both accounts.

Barron’s sought advice on starting and running a sovereign-wealth fund from Norway’s Government Pension Fund-Global, Singapore’s Temasek, and the Qatar Investment Authority. None of them responded.

Most sovereign funds don’t issue financial reports. In Kuwait, public disclosure of any information about the Kuwait Investment Authority is against the law. One reason for all that reticence, says University of Oklahoma finance professor Bill Megginson, is that the funds aren’t very good investors.

Poor investment performance can stem from political interference, says Megginson.

Saudi Arabia’s Public Investment Fund has invested domestically in mostly “goofy” real estate and industrial development projects, he says. He points to The Line, a city for nine million that Saudi Arabia plans to stretch 110 miles through the desert. The investment fund didn’t immediately respond to a query from Barron’s.

Norway is an exception among sovereign funds. Since 1996, it has grown to nearly $2 trillion. The website of its Government Pension Fund-Global—also known as the Oil Fund—is a gusher of audited information on holdings and results. The fund’s professional managers are insulated from politics, and even a small change in its mandate requires a supermajority vote in parliament, notes Fotak.

Singapore’s Temasek started in 1974 with a bundle of state-owned companies, such as Singapore Airlines, then branched out as its assets outgrew Singapore. Managing them on behalf of the Ministry of Finance, Temasek’s portfolio has compounded at 14% a year to reach $340 billion dollars. It has published results since 2004. The government has no one on the fund’s board, and Singapore’s constitution requires approval of the country’s president for any transaction that would draw on the fund’s reserves.

“This is the model the U.S. should and probably will follow if it rolls out a sovereign-wealth fund,” says Megginson.

The motivation behind the U.S. government stakes in Intel, MP Materials, and potentially other chip makers and defense firms, seems to be to spur American innovation and industrial development.

Unfortunately, governments have proven poor at picking winners in technology. European governments made extensive investments to spur innovation, but a study by Fotak and others showed that the resulting patents were worth far less than those developed in the private sector.

Private capital for companies like Intel and Lockheed isn’t lacking in the U.S. That makes Fotak wonder if the real aim of the Trump administration’s equity stakes is to enhance its political influence over the economy and to create patronage possibilities.

“Every politician wants a sovereign-wealth fund to control,” says Fotak. “They have become a standard tool of autocrats in concentrating power.”

Write to Bill Alpert at william.alpert@barrons.com