If you had to guess, would you know which sovereign wealth fund is the biggest in the world?
At a hunch, you’d probably guess it to be one of the oil rich states. Like Saudi Arabia, the United Arab Emirates (UAE), or maybe Kuwait.
If you went with oil, you’re right on the money. Of the five largest sovereign funds in the world, four trace their wealth directly to oil.
The only one that doesn’t is China. The China Investment Corporation sits in third place, with just over $800 billion in funds.
However, China might argue the result. Add in two of its other sovereign funds, and this quickly jumps to over US$1.5 trillion.
While the above-mentioned Arab States are in the top five, there’s another oil rich country that sits at the top of the heap.
If you don’t know yet, that country is Norway.
With just over five million people, Norway’s population is barely bigger than Sydney or Melbourne. Yet with funds of US $1 trillion, its Government Pension Fund is around $200 million bigger than its nearest rival.
Founded in 1990, Norway’s sovereign fund has a massive $650 billion invested in equities around the world. Think Apple, Alphabet (owner of Google), Nestle and Microsoft. All up, it has investments in around 9,000 companies, spread across 77 countries.
It invests another US $320 billion in bonds, with only a smattering (US $2–3 billion) in real estate.
If Norway’s sovereign fund only ever looked at home, it would quickly run out of places to invest. The Oslo Stock Exchange only has around 220 listings.
What Norway realised early, and other sovereign funds too, is that you can’t rely only on domestic markets to generate returns.
A decade of outsized returns
While it’s still only a fraction of the size of Norway’s, there is another sovereign fund racing up the list. Barely in the race a few years ago, Australia’s Future Fund has generated a decade of outsized returns.
As I wrote in yesterday’s article, the Future Fund only started in May 2006. At the time, the government put in just over $60 billion.
In only 10 years, however, the fund has grown to $133 billion. And all this without a single additional cent from the government.
What the Future Fund does is different to the way many funds invest. Rather than put big chunks of money into the local market, like Norway, it takes a bigger view.
In fact, as of June this year, the Future Fund only had 6% of its funds invested in Aussie stocks. That’s less than one-third of the amount it has in international shares. What’s more, Aussie stocks are its smallest holding.
For local investors, used to investing in local bank and mining stocks, this might seem unusual. Probably not the way they’d invest themselves.
But in doing so, the Future Fund has well and truly beaten its benchmark. And as its recent results showed, has done so every year since it started.
Since inception, the Future Fund has generated a 7.8% return per annum. That’s well above its target of 6.9%.
However, over the last year, its results have been even more impressive. Generating 8.7%, the Future Fund beat its 6.4% target by an impressive 2.3%.
That’s a great result, considering the huge amounts involved. Just that outperformance is worth an extra $2–3 billion per year. Even more impressive is that it generated this return with over 20% of its holdings sitting in cash.
And if the Future Fund continues with its stellar returns, it could continue its rise up the sovereign wealth list. Who knows, within a decade it could be knocking on the door of the world’s top 10.
That’s if the pollies don’t get their hands on it.
How you can piggyback the Future Fund
The good news, however, is that you too can ‘piggyback’ the Future Fund. Eventually the Future Fund will have to start taking money out to meet the superannuation commitments of the public servants it serves.
However, as a private investor, you get to decide when to put your money in…or take it out. What’s more, you can run a Future Fund style portfolio in addition to your own superannuation fund. You can even use it if you don’t have a superannuation account.
I’ve prepared a special report which shows you where the Future Fund invests its money. What this report also shows you is how you can replicate its holdings — all through the ASX.
And while the Future Fund has beaten its benchmark comfortably, there’s one stock I’ve included that has more than doubled its benchmark. Not just for a year or two, but for almost two decades.
This stock is just one of seven you can check out in my special report. To find out how you can piggyback the Future Fund, please click here.
Editor, Total Income