Canada Strong Fund: A Solution in Search of a Problem

Highlights

• The Government of Canada recently announced the creation of Canada’s first sovereign wealth fund—the Canada Strong Fund (CSF). But there have been a lot more questions than answers since the announcement, including: What is it? How will it work? And why is it being created?
• The first thing to note is that the Canada Strong Fund is not a sovereign wealth fund (SWF), at least not as they are understood elsewhere in the world. The debt-financed nature of the CSF is very different from the surplus resources that provide the seed capital for true SWFs.
• Instead, the Canada Strong Fund appears to be a domestic development fund, like the many others that have been created over the past decade. Indeed, it’s worth asking what sets the CSF apart from other federal funds. Where the CSF may differ is that it can invest in large projects and the equity of Canadian companies at commercial rates of return along with the private sector. But this begs the question: Why not let the private sector make the investments?
• Adding to the confusion around the CSF’s mandate is the opportunity for retail investors to participate. First, only those with savings can take advantage of this opportunity. Second, the CSF is much like existing investment products, like principal protected notes and market-linked guaranteed investments. Both types of financial products are currently sold by Canadian financial institutions, meaning there is a risk that the CSF will crowd out the private sector.
• At the end of the day, the Canada Strong Fund is a solution in search of a problem. The federal government would be better off focusing on reducing and harmonizing regulations and other barriers to investment within Canada rather than on launching a new, complicated development fund.