U.S., U.K. urged to join others in creating new savings funds

As governments increasingly turn to sovereign pools of assets to help their economies through the coronavirus pandemic, calls for the creation of national wealth funds in the U.K. and U.S. are growing.

Executives working in the world of sovereign wealth funds said they expect governments to consider launching a national savings vehicle, having seen the battering their economies took in the coronavirus pandemic.

"I would expect to see a bunch of new funds created over the next few years," said Ashby H.B. Monk, executive and research director of Stanford University's Global Projects Center. "That's what happens anytime there is a crisis: Governments see the value of a self-insurance policy."

However, executives pointed out that should governments be considering a sovereign wealth fund to help their economies through this crisis, it may already be too late to do so.

Passing the necessary laws or forming a new wealth fund "may take years, so it would not be in time for COVID reliefs in any case," said Diego Lopez, New York-based managing director at Global SWF, a firm that tracks sovereign wealth funds and public pension funds.

Mr. Monk agreed: "If you want to have a sovereign fund (to help the economy) in a crisis — which is when every govern- ment wants one — you need to make plans when there isn't a crisis raging, when things are going so well that you have excess reserves that can actually be saved."

Such funds are meant to be countercyclical, he said — governments "save in the good times to have money in the difficult times. ... The U.K. and U.S. would have needed to set these funds up ages ago for them to be able to have a meaningful effect today," Mr. Monk said.

However, preparing for any future crises by creating a sovereign wealth fund may still be on the cards for some markets.

Should the U.S. choose to create a fund that would operate on a national level, beyond existing state-level asset pools, there is already something to work from.

Mr. Monk cited the Social Security Trust Fund as a potential starting point. The Social Security Administration reported $2.9 trillion in reserves at the end of 2019. "There could be an entity that is national and has sufficient capital. … It would simply require an overhaul of the investment strategy — which is today entirely U.S. Treasuries," he said.

The U.K. has a number of options. "The rulebook's been thrown up into the air, and it's time to look again at whether we could create something of value," said Rod Ringrow, London-based head of official institutions at Invesco Ltd.

Sources said ideas for creating such a fund include through the issuance of debt, with proceeds pooled for investment in companies; and the creation of a government-owned fund to take equity stakes in companies.

"If the government started taking equity stakes in British companies (through a sovereign wealth fund), for example, instead of loaning them money, that is a perfectly reasonable basis for a fund," said Victoria Barbary, London-based director of strategy and communications at the International Forum of Sovereign Wealth Funds.

And the U.K. has precedents: The government set up what is now private equity and venture capital firm 3i Group PLC to help the country recover from the impact of World War II. There is also the U.K. government-owned CDC Group PLC, a development finance institution with a $5.8 billion portfolio that invests in businesses in Africa and South Asia. Returns are reinvested into more businesses, with the aim of reaping returns for U.K. taxpayers.

"But the challenge for the U.K. is that … (any new fund) has to be run commercially. The clue to the term 'sovereign wealth fund' is it requires you to have assets, rather than issue a big bond and have something you have to service — that liability is very different if you have to service that debt," Ms. Barbary said, adding that a requirement to service debt "changes how you think about investment."

Another option would be to allocate a set amount of the government budget every year to be invested in equity stakes in small- and midsize companies, or to help U.K. firms invest abroad, similar to the way Spain's Compania Espanola de Financiacion del Desarrollo works, she said. COFIDES is the Spanish development finance institution, a state-owned company that invests in projects with the aim of benefiting emerging markets and Spanish companies.

Calls for a U.K. sovereign wealth fund were echoed in a commentary this month by Peter Harrison, group CEO at £500.2 billion ($631.2 billion) money manager Schroders PLC. "Bold action is needed now to bring new money into the market" to support small-cap U.K. firms, he said.

"That is why we have suggested the creation of a government patient capital fund. ... Other countries have been very successful in building sovereign wealth funds; the U.K. has long needed a framework to help small companies scale up."

But some executives are not even sure a wealth fund is needed in the U.K. or U.S.

"For some reason, the pandemic has revived these discussions, but perhaps on an unfounded, general sentiment of a last resort to save the economy," Mr. Lopez said.

It's also worth considering that setting up and running a wealth fund "may be a costly vehicle if not formulated or run correctly," with costs including the hiring of external money managers and paying salaries, Mr. Lopez added.

Where governments do have sovereign wealth funds to draw on to support their economies through the pandemic, they've done so in different ways.

Two countries have created subfunds. In May, Ireland's minister for finance and public expenditure and reform, Paschal Donohoe, announced the carving out of €2 billion ($2.3 billion) from the Dublin-based Irish Strategic Investment Fund's €10.8 billion portfolio to create the Pandemic Stabilization and Recovery Fund. The subfund supports businesses that would be commercially viable were it not for the coronavirus.

The second example cited by sources was Folketrygdfondet, the in-house manager of the 237.3 billion kroner ($25.2 billion) Government Pension Fund of Norway, Oslo — a wealth fund focusing on domestic investments — which was given a new mandate by the Ministry of Finance in March: To revive and run the Government Bond Fund.

The fund, also used during the global financial crisis, aims to increase liquidity and capital inflows in the Norwegian bond market.

Another option for governments is to withdraw cash from their sovereign wealth funds — something that, in most cases, is within their mandate:

• In May, the Norwegian government said it would make an almost 420 billion Norwegian kroner ($44.6 billion) withdrawal of petroleum revenues from the 10.1 trillion kroner Government Pension Fund Global, Oslo.
• In April, the Nigeria Sovereign Investment Authority, which runs 649.8 billion naira ($1.7 billion) across three sovereign funds, said the government planned to make its first withdrawal, of $150 million, from the $351 million stabilization fund. The cash will "assist government in addressing the emerging fiscal risks due to the coronavirus pandemic and the recent decline in government revenue," a news release said.
• Also in April, a €1 billion withdrawal from the National Development Fund of Islamic Republic of Iran, Tehran, was approved to "confront and manage the effects of (the) coronavirus outbreak in the country," a statement posted on President Hassan Rouhani's website said. The fund has $91 billion in assets, according to the Sovereign Wealth Fund Institute.

Despite the damage caused by the pandemic, "we haven't seen that many additional withdrawals," Ms. Barbary said.

The reason is that many countries can borrow cheaply on the international markets, which is cheaper than liquidating wealth fund holdings and maintains a country's credit rating, she said.

However, as the pandemic runs on, there will be increased pressure on "those countries with perhaps less robust economies and less headroom to borrow, and we are starting to see withdrawals being (considered)," Ms. Barbary said.