Sovereign wealth funds invest in a variety of assets, including shares, bonds, real estate, precious metals and alternative investments like private equity and hedge funds. The goal is to generate returns that can be used to support national budgets, fund social programs or save for future generations.   

The funding for SWFs typically comes from surplus revenues from natural resource exports (e.g., oil and gas), foreign exchange reserves, trade surpluses, and budget surpluses. For example, Norway's Government Pension Fund Global is funded by oil revenues, while Australia's Future Fund is funded by budget surpluses and government contributions.   

How do sovereign wealth funds set financial goals?   

• Long-term objectives: SWFs set financial goals based on their long-term objectives, which often include preserving wealth for future generations, stabilising the national economy, and reducing dependence on volatile commodity prices. These goals guide their investment strategies and asset allocation decisions.  

  
  

• Strategic asset allocation: SWFs use Strategic Asset Allocation (SAA) to achieve their financial goals. This involves diversifying investments across various asset classes and regions to balance risk and return. For example, they may allocate a portion of their portfolio to shares for growth, bonds for stability, real estate for income, and alternative investments for diversification.  

  
  

• Risk management: Effective risk management is crucial for SWFs. They conduct stress tests, scenario analyses, and other risk assessment techniques to evaluate the potential impact of economic and market conditions on their portfolios. This helps them adjust their investment strategies to mitigate risks and achieve their financial goals.  

  
  

• Environmental, Social and Governance (ESG) considerations: Many SWFs incorporate ESG factors into their investment decisions. This involves evaluating the environmental, social and governance practices of potential investments to ensure they align with the fund's values and long-term objectives. ESG investing can help mitigate risks, enhance returns and promote sustainable development. 

  
  

• Regular review and adjustment: SWFs regularly review and adjust their investment strategies and asset allocations to ensure they remain aligned with their financial goals. This involves monitoring market trends, economic conditions, and the performance of their investments. By staying adaptable and responsive to changes, SWFs can better achieve their long-term objectives.  

  
  

Sovereign wealth funds play a vital role in managing a country's financial assets and ensuring long-term economic stability. By setting clear financial goals, diversifying investments, managing risks, and incorporating ESG considerations, SWFs can achieve their objectives and generate wealth for future generations. Individual investors can learn from these strategies to improve their own investment outcomes and build long-term wealth.