Most Sovereign Wealth Funds Are Poor Performers. The U.S. May Still Get One.

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

With the exceptions of Norway and Singapore, many sovereign funds are mediocre investors, and poor venture capitalists, studies find.

With its 9.9% 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.

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 piece of Intel. It will get 15% of Nvidia and Advanced Micro Devices chip sales in China. Kevin Hassett, Trump’s National Economic Council director, said the government is thinking about demanding equity from other chip makers who won grants under the $39 billion CHIPS and Science Act of 2022.

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 Barron’s that it is “continuing our strong working relationship with President Trump and his Administration to strengthen our national defense.”

A U.S. sovereign fund is “a very bad idea whose time may have come,” says Bill Megginson, a finance professor at the University of Oklahoma.

“How transparent is this going to be?” he wonders about the de facto U.S. sovereign fund. “And how politicized?” The Republican administration’s precedent may inspire a future Democratic administration to get even more deeply into state ownership, Megginson worries.

Over 100 nations have some form of sovereign-wealth fund, adding up to more than $10 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.

These countries have government and trade surpluses to fund their investments. The U.S. has deficits in both accounts, not to mention a skilled venture-capital industry and deep financial markets.

Most sovereign funds don’t issue financial reports. In Kuwait, public disclosure of information about the Kuwait Investment Authority is against the law. One reason for all that reticence, says 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 “goofy” real estate and industrial development projects, he says, pointing to The Line, a city for nine million that Saudi Arabia plans to stretch 110 miles through the desert. The investment fund didn’t 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.

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 $325 billion dollars. 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 down fund reserves.

“This is the model the U.S. should and probably will follow if it rolls out a sovereign-wealth fund,” says Megginson. To emulate the likes of Temasek, however, the U.S. would need to diversify beyond chips and defense. And with America’s high debt levels, it isn’t clear where funding would come from.

Officials say that government stakes in Intel, MP Materials—and potentially others—will secure strategic resources, spur innovation and drive industrial development.

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

Speaking to CNN on Wednesday, economics advisor Hassett said the White House also wants to recoup some of the cost of the previous administration’s CHIPS Act grants. “We need Intel to succeed for natural security,” he said. “Helping reduce the cost of that program by letting shareholders be taxpayers is something that makes a great deal of sense.”

Since private capital for companies like Intel and Lockheed isn’t lacking in the U.S., Fotak wonders if the real aim of the Trump administration’s equity grab is to enhance its political influence over the economy.

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