Prime Minister Mark Carney recently announced Canada’s first national sovereign wealth fund, the Canada Strong Fund. It’s aimed at investing $25 billion in domestic projects while offering Canadians a chance to invest alongside the government.

The fund has a dual mandate to deliver market-rate returns while also investing in Canadian projects that build a stronger and more resilient economy.

But these goals can conflict, and the fund’s current design raises questions the government has not yet fully answered.

What is a sovereign wealth fund?

A sovereign wealth fund is a pot of money owned and invested by a government to generate returns and build national wealth over time.

More than 100 exist globally, collectively managing more than US$10 trillion in assets. Most are funded from commodity surpluses or foreign-exchange reserves.

They differ from other public funds in important ways. Public pension funds manage money on behalf of retirees. Public banks and development funds lend or invest at below-market rates to achieve policy goals. Central bank reserves are held as a financial buffer, not invested for return.

Sovereign wealth funds are explicitly in the business of growing state capital. Governments can also use them to achieve geopolitical and economic goals.

Norway’s Government Pension Fund Global, valued at approximately US$2.2 trillion, is the best-known example. It invests oil revenue in a globally diversified portfolio to preserve the country’s resource wealth for future generations.

The Santiago Principles — a set of voluntary governance standards adopted by the international sovereign wealth fund community in 2008 — outline what responsible management looks like.

How does Canada Strong compare?

Canada’s new sovereign wealth fund fits the criteria of being government-owned and seeking market-rate returns. However, it diverges from standard practice in three notable ways.

First, it will be funded from a budget that is already in deficit. Canada’s projected deficit for 2025-26 is $66.9 billion. The $25 billion for the fund will be drawn from the federal budget over three years, meaning the fund is being prioritized over debt reduction and other spending commitments.

Second, the fund will focus on domestic investment. Most sovereign wealth funds invest globally, following best practices from the Santiago Principles to diversify risk.

A fund concentrated in one country’s economy heightens financial risk and is more exposed to political pressure. This concern is serious enough that some sovereign wealth funds have banned domestic investments completly.

Third, it will include an option for retail investors to directly invest in the fund. No existing sovereign wealth fund offers this.

Asset recycling and its risks

To grow the fund over time, the government is also considering raising funds through what it calls “asset recycling” or “asset optimization.”

Pioneered in Australia through a 2014 federal initiative, asset recycling involves selling or leasing public assets to fund new infrastructure.

Early reporting suggests the federal government is considering selling or leasing airports and reinvesting those funds into the Canada Strong Fund.

When asset managers take over public infrastructure, it introduces an additional dimension of risk. The Thames Water company’s record of sewage dumping, crumbling infrastructure and high levels of debt in the United Kingdom offers one cautionary case study.

Research on the privatization of both the Heathrow and Brussels airports highlights increased costs for airlines and passengers, with poorer levels of service.

A dual mandate and its trade-offs

In addition to higher risk, the Canada Strong Fund’s dual mandate may also lead to lower returns. If the fund invests on fully commercial terms alongside private investors, it risks crowding out private capital in projects that would have been funded anyway.

If, instead, it accepts lower returns when supporting strategic projects, it quietly abandons the market-rate mandate and the promise of creating wealth for Canadians.

Where the government identifies infrastructure priorities without a clear business case, it could consider direct public ownership rather than routing investment through the Canada Strong Fund.

When mixing priorities, the trade-off against financial performance is unavoidable. To have a genuine impact, the Canada Strong Fund will need to behave less like a sovereign wealth fund and more like the Canada Infrastructure Bank or the Canada Growth Fund.

Unlike the Canada Strong Fund, however, those two vehicles are upfront about accepting below-market returns to advance their priorities.

What about retail investors?

The most novel feature of the Canada Strong Fund is the retail investment product. The government has said the product will be broadly accessible to Canadians, simple to purchase and structured so investors share in any upside while their initial capital is protected.

According to a 2024 survey conducted for the Financial Consumer Agency of Canada, there has been a significant drop in the retirement readiness of Canadians since 2019. A retail product tied to Canadian nation-building could, in principle, help address that gap.

Yet challenges remain. The promise of shared upside with limited downside risk introduces complexity to the product. The performance of complex instruments is lower than the performance of simpler instruments. Retail investors may also struggle to gauge the risk-reward trade-offs associated with the Canada Strong Fund’s dual mandate.

There is also the question of what happens if the fund loses money. The government has stated they will protect the initially invested capital of retail investors, but it is not clear where this money will come from.

If retail investors effectively pay an embedded insurance premium, that premium reduces their return. If the government subsidizes the cost of that protection, it amounts to a cross-subsidy from Canadians who do not participate in the fund to those who do — an outcome that could be regressive, depending on who invests.

What would make it work?

A well-designed Canadian sovereign wealth fund has genuine potential to grow our nation’s generational wealth and financial resilience.

Other sovereign wealth funds have achieved these ends through a focused mandate to invest for financial objectives, as outlined in the Santiago Principles. The odds of Canada Strong Fund succeeding would be improved by pivoting towards these principles.

Canada could follow Norway’s model of running two separate funds. It could leave the existing Canada Growth Fund to pursue domestic strategic investments, and have the Canada Strong Fund invest abroad with the sole goal of building national wealth.

That separation would reduce internal conflict, clarify accountability and give the retail product a cleaner return profile.

Paul Calluzzo receives funding from Social Sciences and Humanities Research Council.

Dan Cohen receives grants from the Social Sciences and Humanities Research Council of Canada: one on monetary policy (grant number 435-2022-0069) and one on social finance (grant number 4030-2020-00085). He is also a member of the New Democratic Party.

Evan Jo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.