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Three Steps to Improve Sovereign Wealth Fund Performance

Sovereign wealth funds (SWFs) can be effective tools for managing natural resource revenues. However, as their numbers continue to grow, with the largest funds managing hundreds of billions or even a trillion dollars in assets, researchers are paying more attention to how well these funds are governed.

Columbia University Press has published a new book on sovereign wealth funds, providing a sorely needed practical look at how these funds work—and how they should work. The New Frontiers of Sovereign Investment combines the insights and experience of academic economists and practitioners from several countries to survey fund activities and investments.

I was pleased to add a chapter to the book, titled “Playthings and Parallel Budgets: The Economic and Governance Performance of Sovereign Wealth Funds.” The chapter examines SWF performance over the last decades, concluding that success stories are the exception rather than the rule. I make three recommendations to improve SWF performance:

  • Clarify and align operational rules—namely deposit, withdrawal and investment rules—with the fund’s objectives.
  • Ensure independent oversight.
  • Prohibit home investments.

Andrew Bauer is a consultant with the Natural Resource Governance Institute (NRGI).