Canada’s First Sovereign Wealth Fund
Welcome to the Alts Sunday Edition 👋
I hope you enjoyed last week’s issue on housing’s agglomeration loop.
A few weeks ago, Canadian Prime Minister Mark Carney announced Canada’s first ever national sovereign wealth fund: The Canada Strong Fund.
We posted about it on our Instagram, and comments came flooding in. Some of them were genuinely sharp. Others were, well, the internet being the internet.
“Sovereign debt fund!” “Government-backed Ponzi scheme!” “Canada is cooked!”
But the critics aren’t entirely wrong, and neither are the people defending it. What Carney proposed is an innovative, unique, complicated idea, executed in an unusual way, by someone who probably knows more about fund management than any living Prime Minister anywhere.
I have a particular interest in sovereign wealth funds. My extended family created the Alaska Permanent Fund, and it’s a topic I keep coming back to, most recently with Singapore.
So when a government announces a new sovereign wealth fund, I pay attention.
In this issue, I’ll break down how the fund actually works, make the case for both sides, and highlight what to watch in the months ahead.
Let’s go. 👇
What is this fund, actually?
The Canada Strong Fund is a government-owned investment vehicle designed to co-invest alongside private capital in national infrastructure projects.
Think ports, mines, energy, agriculture, etc. The kind of large-scale stuff that private investors avoid because the timelines are too long.
As for how it came to be: Carney simply announced it on April 27th. It wasn’t put to a vote. Rather, the funding was embedded into the budget; which is common in Parliamentary systems like Canada’s.
The legislation to establish the fund’s structure is still being worked through. The money has been committed, but the plumbing is still being built.
The government is initially coughing up $25 billion over three years. It will be run as a “Crown Corporation“ — a government-owned entity with and independent CEO and board, designed to operate at arm’s length from day-to-day political interference, while still being accountable to Parliament. (Think Canadian Broadcasting Corporation, or Canada Post.)
To put the scale in context, the Canada Strong Fund launches with $25 billion CAD. Norway’s fund sits at around $2.6 trillion. Abu Dhabi’s is close to $1.4 trillion. Australia’s Future Fund — a more comparable Western nation — is around $205 billion. Even Alberta’s own Heritage Savings Trust Fund, a provincial fund built from oil royalties over five decades, currently sits at around $32 billion.
What’s interesting about this fund is that individual Canadians will be able to invest directly.
Yes, Norway, Singapore, and Abu Dhabi all have sovereign wealth funds. But none of them let ordinary citizens buy in directly! Canada is proposing something different: you put money in, you earn a return.
On paper, it sounds reasonable. The catch (and it’s a significant one) is how the government is funding its own $25 billion contribution.
The problem with the name
Every serious sovereign wealth fund in the world was built from surplus.
Norway’s fund (the world’s largest, now worth $1.9 trillion) was seeded with excess revenue from North Sea oil. Abu Dhabi’s was built on petrodollars. Even Alberta’s was funded from oil royalties the government had already collected.
But in Canada, the federal government is running a deficit. There is no surplus. So the $25 billion is being borrowed.
Specifically, Canada will raise the money the same way it finances any spending beyond its tax revenues — by issuing government bonds which get scooped up by institutions, foreign governments, pension funds, and asset managers around the world.
As of the announcement, Canada’s 10-year government bond yield sat at around 3.5%. That’s the cost of capital. So before this fund generates a single dollar of real national wealth, it needs to clear a return hurdle of 3.5%.
Carney’s finance minister pointed to Canada’s relatively strong credit rating and its ability to borrow at favorable rates internationally. Which is true. But as the Globe and Mail noted, it means the math is tighter than the announcement made it sound.
The bull case
So why might this actually work?
Let’s start with the problem it’s trying to solve. Infrastructure is incredibly important to societies, yet private investors (even alternative investors) often stay away from it.
Like many countries, Canada has a serious infrastructure gap, which private capital hasn’t filled on its own. A government vehicle designed to co-invest alongside private capital is a reasonable idea!
Then there’s Carney himself. You can debate the policy, but it’s hard to argue with the guy’s resume.
Now let’s talk returns, because the government hasn’t published a specific target, just the phrase “market-rate returns.”
So what does that actually mean in practice?
Well, the The average 10-year return across sovereign wealth funds globally is around 6.3%. Norway’s fund has averaged 6.6% annually over its lifetime. A classic 60/40 portfolio of stocks and bonds has returned roughly 7.9% over the same period. Those are your reference points.
Anyways, against a borrowing cost of 3.5%, here’s how the scenarios shake out.
If the fund performs like an average global SWF, you’re looking at a net spread of around 2.8% before operating costs. Not spectacular, but a real return on national capital.
If it performs more like Norway, the net spread above borrowing costs is around 3.1%. That doesn’t sound like much — but applied to $25 billion over 30 years, it compounds to roughly $36 billion in real wealth generated above the cost of capital. That’s the difference between a fund that merely justifies its existence and one that genuinely transforms Canada’s fiscal position.
The honest bull case isn’t that this fund will definitely generate great returns. It’s that Canada has a real infrastructure problem, a credible architect, and a reasonable structural template — and that if it’s run with genuine independence, there’s a path to it becoming something real over time.
The bear case
Here’s the scenario that makes bears worried.
Ireland runs a domestically focused sovereign fund. It’s similar in structure to what Canada is proposing. Over the past decade it has returned around 3.4% annualized. That’s less than Canada’s borrowing costs of 3.5%. If Canada’s fund gets 3.4% returns, it’s indeed cooked.
Then there’s Canada’s own track record. In 2017, Trudeau government launched the Canada Infrastructure Bank with a $35 billion mandate, and near-identical rhetoric about private capital & national infrastructure.
However, nearly a decade later, Canada’s own Parliamentary Budget Office stated it would disburse less than half that (around $14.9 billion) by its 2028 deadline. Worse, roughly two-thirds of its co-investments came from public partners rather than private ones, the opposite of what it was designed to achieve!
Finally, there’s the durability question. Norway’s fund works partly because it was architected to be bipartisan. It has survived decades of government changes without being dismantled. But Canada’s Conservative opposition has already called Canada Strong Fund a “sovereign debt fund” and shown no sign they’d preserve it.
The structure of the fund is supposed to guard against this. (Independent board, arm’s-length Crown corporation design, etc). But note that the founding legislation hasn’t actually been written yet, so key questions remain unanswered:
How clearly is political interference prohibited?
How is the CEO appointed and removed
What stops a future government from redirecting the fund toward projects that are politically convenient rather than commercially sound?
“Investing in projects that can change on political whim, seems shaky...no?” — @stef_mart, Instagram
Closing thoughts
I’m not a Canadian citizen or resident, so my opinion doesn’t mean much: But I generally agree with this comment:
The most liked comment on our Instagram post wasn’t from a critic or a cheerleader:
“Norway and Singapore are great examples of why this is a good idea, but those are countries where the government enjoys high trust. It has to be well run and prestigious enough to attract talent to manage it.” — @still_very_dodgy (173 likes), Instagram
This is a critical point right here.
The Canada Strong Fund is not a bad idea in principle. The infrastructure gap is real. The co-investment model is sound. The retail component is interesting. And Carney is definitely well-positioned and well qualified to pull this off.
But the way this fund is architected will be critical, because none of that matters if the fund becomes a political instrument or gets dismantled the moment the government changes.
No CEO has been named. The founding legislation that will define how much independence the fund has hasn’t been written. The retail investment product is still being designed. The government has said all of this will be resolved “in the coming months,” but no specific timeline has been given.
When my family created Alaska’s Permanent Fund, they baked it right into Alaska’s Constitution.
And a constitution-protected wealth fund that compounds for fifty years is a completely different animal from one that gets restructured every election cycle.
Right now, nobody knows which one this will be!
So in the meantime, this should be watched closely:
When they name a CEO, look at whether it’s a genuine capital markets appointment or a political one.
When the legislation drops, read the governance provisions carefully. They’ll tell you more about what this fund is really meant to do than any press release will.
And watch whether the Conservative opposition shifts its position as the fund takes shape, because without some degree of political durability, the compounding that makes sovereign wealth funds genuinely powerful simply won’t happen.
The fund was announced four weeks ago. The next few months will tell us whether Canada is building something real and lasting. 🇨🇦
That’s it for today!
As always, you can find me in the Altea Community.
See you next time, Stefan
Disclosures
This issue was written and edited by Stefan von Imhof.
This issue was sponsored by Heron Finance.
It contains an affiliate link to Bookshop.org. If you buy the book about Venice, we get a few bucks.
As always, nothing in this issue is investment advice.