Many Sovereign Wealth Fund Managers Come Up Short

"The well-managed funds are very explicit about where their money comes from and what their objectives are," Mitchell says. "They're reporting the nature of their investments and the funds' geographic diversification. They issue quarterly reports, and they protect the funds' managers from political interference. New Zealand's plan has even put in place guidelines for corporate responsibility, outlining the way it will intervene, or not, in companies in which it invests, and what types of assets it will or won't seek to hold. It publishes a formal 'responsible investment policy' manual, which takes into account the environmental impacts and employment-rights practices of companies in which it invests."

Just as important, both countries try to insulate their funds from political meddling, which is perhaps the biggest peril for a government-run investor.

They achieve this partly by investing much of their money abroad, thus reducing pressure from elected officials to back friends' and supporters' companies or hometown projects. Norway, for example, holds about 60% of its assets in foreign stocks and 40% in foreign bonds. New Zealand has 40.5% in foreign stocks, 7.5% in domestic stocks, 17% in bonds and 35% in other asset classes, including real estate, timber and private equity.

Both of these funds were created by democratic governments, giving them a legal obligation to operate openly. And, by doing so, they also generate support for their financial mission. In theory, if citizens understand and trust a fund's goals, they should be less likely to clamor for tax cuts or increased benefits. "New Zealand has been explicit that it's building this asset pool now in the hope that it will help to buffer future pension payments," Mitchell says. "It takes resolve to be that unambiguous about intergenerational tradeoffs."

Too Tempting

The United States has repeatedly stumbled in its efforts to put financial priorities ahead of political hurly-burly in the administration of its Social Security system. Back when President Franklin Roosevelt championed the national public pension plan, he envisioned an agency that would collect money from workers, invest it and then pay benefits out of those contributions and investment returns, not out of current tax receipts, as occurs today. "What happened was that the pool of assets started to build up, and it was too tempting -- politicians increased benefits and reduced the retirement age," Mitchell says.

Likewise, during the Clinton administration, federal policymakers discussed investing some of Social Security funds in the stock market, which prompted all manner of political carping and caterwauling. "One group didn't want investments in companies that weren't green," Mitchell recalls. "Another was worried about companies that shipped jobs overseas. At the time, it became quite clear that it would be difficult to insulate a U.S. government investment board from these kinds of pressures. This may be one reason that the Australian Future Fund will eventually steer all of its money outside of the country."

Several of the sovereign wealth funds at the bottom of the authors' ranking don't operate in democracies and thus may face less pressure to operate transparently than their counterparts in Norway and New Zealand. Abu Dhabi, for example, is part of the United Arab Emirates and is governed by an emir, or prince, who chairs the board of the country's fund.