A sovereign wealth fund to invest in strategic companies: a good or a bad idea? 

Today’s op-ed is by António Nogueira Leite, Deputy Academic Director of the Public Policy Institute. The original in Portuguese is here.

 

The possible creation of a sovereign wealth fund (SWF) in Portugal to invest in strategic companies is a bad idea for structural, governance, and empirical reasons that are well documented in the economic literature. 

Portugal does not have extraordinary budget surpluses (such as Norway’s oil revenues) or significant excess foreign exchange reserves. With public debt around 90% of GDP in 2026 (though on a downward trajectory thanks to primary surpluses), creating a SWF would require diverting scarce fiscal resources or taking on additional debt. This turns the vehicle into a leveraged fiscal strategy: the state assumes the downside risk in volatile assets (shares of “strategic” companies), while taxpayers bear any losses. Analyses of previous SWFs (in other countries) without surpluses precisely highlight this risk of macro-fiscal fragility and governance problems. 

Governments systematically prove to be poor “stock pickers.” Information asymmetry (Hayek) and public-choice incentives lead decisions to be captured by electoral cycles, clientelism, or interest groups rather than by risk-adjusted return criteria. The empirical evidence on industrial policy (“picking winners”) is predominantly negative or, at best, mixed: existing economic distortions amplify government failures, and political capture diverts resources from more productive uses. 

The specific literature on sovereign wealth funds reinforces this conclusion. Bortolotti, Fotak, and Megginson (2015), in the Review of Financial Studies, document the “sovereign wealth fund discount”: abnormal announcement returns from SWF investments in stocks are positive but significantly lower than those generated by private investors (a discount of roughly 1.3 percentage points after controls). Long-term effects on target companies tend to be negative or neutral.  

In countries without abundant natural resources, the record is even more discouraging. Le Borgne and Medas (2007), in an IMF Working Paper, show that sovereign wealth funds in the Pacific islands frequently failed to stabilize public finances because of poor management, rigid rules, and investment losses that undermined fiscal sustainability. 

The successful counterexample — Norway’s Government Pension Fund Global — rests on three pillars that Portugal lacks: (i) genuine excess oil revenues; (ii) a strict mandate for passive, globally diversified investment (with no domestic “strategic” focus); and (iii) professional, independent governance at Norges Bank with explicit rules against political interference. It was designed to bring inter-generational equity to oil and gas rich Norway, once the resources were exhausted. In addition, SWF models that include development or strategic mandates tend to exhibit weaker governance and lower returns. 

Portugal’s own history of direct state intervention — the large-scale nationalizations of 1975–76 in banking, industry, and services — produced chronic inefficiencies, operating losses, and the later need for privatizations to restore performance. A new SWF aimed at “strategic companies” would replicate this pattern of moral hazard and politically driven capital allocation, distorting competition in the European single market and potentially violating EU state-aid rules. 

The opportunity costs are high. The resources would be better used to reduce public debt, implement structural reforms that improve the business environment, or make public investments in human capital and infrastructure — without displacing private capital. Attracting foreign direct investment and developing private capital markets generate market discipline that a state-owned SWF rarely replicates. 

In short, international experience, economic theory, and Portugal’s fiscal context all point to the same conclusion: a sovereign wealth fund focused on strategic companies represents unnecessary fiscal risk, a likely source of allocative inefficiency, and an inferior institutional solution compared with market-based alternatives and continued budgetary consolidation. 

 

Sources and References: 

Åslund, A. (2007, December). The truth about sovereign wealth funds. Foreign Policy. 

Bortolotti, B., Fotak, V., & Megginson, W. L. (2015). The sovereign wealth fund discount: Evidence from public equity investments. The Review of Financial Studies, 28(11), 2993–3035. 

Buchanan, J. M., & Tullock, G. (1962). The calculus of consent: Logical foundations of constitutional democracy. University of Michigan Press.
Davies, G. (2026). Why Sovereign Wealth Funds can be the wrong answer to the right question. LinkedIn.
Devarajan, S. (n.d.). Three reasons why industrial policy fails. Brookings Institution. 

Hayek, F. A. (1945). The use of knowledge in society. The American Economic Review, 35(4), 519–530. 

Juhász, R., Lane, N., & Rodrik, D. (2024). The new economics of industrial policy. Annual Review of Economics, 16, 213–242.
Kemme, D. M. (2026). The Sovereign Wealth Fund Paradox: Evolution, Challenges, and Unresolved Issues. Journal of Risk and Financial Management, 19(2), 119. 

Le Borgne, E., & Medas, P. A. (2007). Sovereign wealth funds in the Pacific Island countries: Macro-fiscal linkages (IMF Working Paper No. WP/07/297). International Monetary Fund. 

 

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