Why the national wealth fund is a cheap knock-off

Track records are one of investors’ most important — and most marketable — selling points. While the small print always warns that “past performance is not a guarantee of future results”, a history of delivering strong returns over a long period of time suggests an approach, or a level of skill, that outperforms in both falling and rising markets.
So, if I were to offer serious asset allocators the chance to invest alongside a fund which a) has been created by bringing together two existing institutions, neither of which can demonstrate consistent, long-term performance; b) gives scant detail on its target returns; and c) has a very confusing name, I wouldn’t expect a queue around the block.
Roll-up, roll-up, ladies, gentlemen and institutional investors, for the chance to put money into the UK’s new “national wealth fund”.
This is one of the government’s flagship measures as it seeks to deliver on its promise of being the party of wealth creation. It’s widely anticipated that more details about the fund, such as the way it will be structured and managed, will be unveiled at the chancellor’s global investment summit this month.
But the more I look at the concept, the more it resembles the more cynical descriptions of the summit itself: a hastily conceived PR exercise.
First, it’s worth a reminder of what the national wealth fund is and what it isn’t. It is a public/private partnership bringing together the UK Infrastructure Bank and the British Business Bank, which will invest in UK green infrastructure and technology. It will launch with an initial £7.3 billion of capital to invest alongside private institutions, hoping that for every £1 it commits, the private sector will commit £3.
What it’s not is a sovereign wealth fund. Sovereign wealth funds typically invest the profits generated from domestically produced commodities. The national wealth fund, however, does arguably the opposite. The UK doesn’t have any surplus profits, so will generate the £7.3 billion by taxing oil and gas companies.
Selecting a name that is so similar to “sovereign wealth fund” as to sound like a synonym is asking for confusion. Plenty of financial professionals I’ve spoken to are unclear on what exactly this fund is and several pieces I’ve read on the subject have referred to it as a sovereign wealth fund.
The government has made little-to-no effort to correct this misapprehension. Perhaps this is unfair but, rather like the market vendor hawking Gucci bags or Giorgio Armani jackets, I get the sense that Rachel Reeves is trying to give the impression of launching a big, shiny equivalent to the behemoth wealth funds of Norway or Saudi Arabia when, in reality, she is touting a cheap knock-off version.
To convince the private sector to commit capital, there are several problems that the government will need to address.
Compared with the enormous investment funds against which it would compete for the best infrastructure assets, the national wealth fund is not big enough in its current form to be competitive. Norway’s Norges Bank has assets of $1.7 trillion, Saudi’s public investment fund has just under $1 trillion and Singapore’s Temasek has a net portfolio value of about $300 billion.
Next, potential investors might well be dubious about the track record of their government bedfellow. UK government-backed funds have a chequered history. The British Business Bank made a £122 million loss last year, as the value of its tech investments plummeted. Other ventures, like the UK Green Investment Bank and the Pension Infrastructure Platform, never fulfilled their promise and were sold off without reaching scale. The UK Infrastructure Bank was only created in 2021, so hasn’t had time to develop a meaningful track record.
Finally, the government’s rationale is that, by co-investing public funds alongside the private sector, they are taking risk off the table. But is this really a big enough carrot? Surely if there were a surfeit of attractive investment opportunities in UK green infrastructure and technologies, wouldn’t they have received a glut of international investment already? They haven’t.
I’m all for financial innovation but only when it’s backed up with appropriate scale, clear targets and its primary aim is to generate financial upside for investors, not column inches.
For the national wealth fund to gain traction with investors, the government needs to convince them it isn’t just political showmanship. Asking the private sector to fund the cabinet’s new wardrobe is one thing. Asking it to fund the emperor’s new clothes is quite another.
Seema Shah is chief global strategist at Principal Asset Management