Careers at a Sovereign Wealth Fund
You’re probably familiar with the use of leverage in a margin account. By combining personal funds with money borrowed from your broker, you double your buying power.
Now imagine harnessing the buying power of an entire country’s resources. That is the playbook of sovereign wealth funds and they’ve become a very powerful force in global economics.
What is a Sovereign Wealth Fund?
Sovereign wealth funds, SWF, are state-owned investment vehicles that invest a country’s surplus revenues. The goal is to enhance a country’s resources for the benefit of future generations.
They take the surplus from resource sales and invest the money into a variety of different asset classes. This helps stabilize the economy in case the key natural resource drops in value because of depletion, market price or alternative options.
With SWFs, we are mainly referring to funds coming from the sale of natural resources, typically oil and natural gas.
Middle East countries are especially vulnerable to the price of these commodities, and this is where the concept of SWF began back in the 1950s. But other countries like Norway and Russia have vast reserves as well.
Today, nearly 60% ($4.2 trillion) of the $7.2 trillion in total SWF assets come from oil and gas sources.1
What do Sovereign Wealth Funds Invest In?
Sovereign wealth funds have the luxury of investing in long-term strategies, since their goal is typically generational growth. This allows them to focus on more illiquid, alternative investments such as real estate, private equity and infrastructure. Since the goal is to diversify away from a natural resource, you shouldn’t find large allocations to commodities, especially among petroleum-based economies.
A 2016 report by Invesco reported a continued shift away from fixed income holdings in lieu of infrastructure stakes.2 These include airports, hospitals, bridges, power stations, oil and gas pipelines and roads.
These investments are attractive because they increase returns while reducing risk. The downside is there is a political stigma attached to many deals.
What are the Biggest Sovereign Wealth Funds?
These massive pools have grown substantially over the last decade. The top five SWFs by assets under management are:3
- Norway Government Pension Fund Global ($1 trillion)
- Abu Dhabi Investment Authority ($828 billion)
- China Investment Corporation ($813 billion)
- Kuwait Investment Authority ($524 billion)
- Saudi Arabia (SAMA) Foreign Holdings ($514 billion)
As shown above, the largest sovereign wealth fund is Norway’s, which recently topped an astounding $1 trillion in assets under management (nearly the size of the entire Mexican economy).4 This fund bucks the trend towards alternatives- opting instead for a near two-thirds allocation to equities.5 Consequently, the fund has some measure of control over 1.3% of all globally listed stocks, giving it considerable clout.6
But this strategy also has outsized risk and is more subject to global equity gyrations.
When markets are up, SWFs like Norway’s are making headlines but it remains to be seen how they will perform in the next economic trough.
The rankings are also a bit deceiving. China actually has four different sovereign wealth funds in the top ten rankings.7 Combined, their assets exceed $2 trillion, doubling Norway’s size. As such, China also has plenty of control over various global assets. China’s SWF has invested heavily in U.S. commercial real estate and taken infrastructure stakes in London’s Heathrow Airport and Australia’s Port of Melbourne.
You probably noticed that the U.S. doesn’t have a sovereign wealth fund listed. The closest thing we have to a SWF is probably the Alaska Permanent Fund Corporation which utilizes the state’s petroleum reserves.
Our Federal Reserve Banks essentially act as sovereign investors. They maintain balance sheets of over $4 trillion in a variety of fixed income investments ranging from U.S. treasuries to mortgage backed securities.
What’s it Like Working at a Sovereign Wealth Fund?
While a SWF is a buy-side investor, working there is significantly different from others in that group, such as hedge funds, PE funds or asset managers like BlackRock. For starters, compensation is considerably less.
According to an interview from a former Australian SWF professional on Mergers and Inquisitions, the base pay is similar to an investment banking analyst but the bonus is only 20%-40% of IB levels.8 It is not unlike working for a public pension fund in the United States.
To attract such talent, they are starting to increase pay. While the bonuses are still lacking, other compensation perks like carried interest are being offered.
There is also more stability in the form of a pension, job security and benefits such as a housing/relocation allowance at many funds. Further, you gain valuable experience with principal investment, something you probably won’t get at a bulge bracket bank for some time.
How can I work for a Sovereign Wealth Fund?
Of course, since we don’t have SWF’s in the U.S., you must be interested in working overseas. While many SWF’s look for local talent, some recruit through New York and London. The Middle East funds appear to do the most international recruiting, many recruited from overseas.
The recruiting process by SWFs typically involves searching for candidate’s prior experience (summer internship or full-time time) at a major U.S. bank. If they don’t find you, try using an executive search firm such as Barclay Simpson.9
More than anything else, SWFs covet investment management skills. The CFA designation goes a long way with sovereign wealth funds. For example, the Abu Dhabi Investment Authority has a long track record of partnering with the CFA Institute and is the largest employer of CFAs in the Middle East.10 They even have a full-time, in-house training program for all levels of the CFA exam.11
A Master’s degree is also helpful at SWFs as long as the emphasis is on finance and/or investment management. An online Masters in Finance or Master of Investment Management and Financial Analysis degree would be helpful. The latter also helps students prepare for the CFA exams themselves.
Landing at a SWF early in your career is a great way to gain hands-on investing experience while obtaining a global perspective which many U.S. employers value.