ModelChoice decision tree · Corporate finance

Sovereign Wealth Fund Allocation

How should a fund invest $5 billion for ten years: growth, balanced, defensive or infrastructure-heavy?

Complexity: ★★★★★
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From the model’s decision tree

Best first decision: Growth Portfolio

The expected value of each first option when every later decision is also made well (the tree rolled back).

First decision	Expected value
Growth Portfolio	$7,325,500,000	✔ best
Balanced Portfolio	$6,550,000,000
Defensive Portfolio	$5,633,000,000
Infrastructure-Heavy	$6,886,750,000

Measure	Value
Expected value of the best strategy	$7,325,500,000
Best outcome on the best strategy	$12,000,000,000
Worst outcome on the best strategy	$2,900,000,000

The best strategy: chance of each outcome or less

S-curve (cumulative probability) of Growth Portfolio from the saved simulation.

The decision

A sovereign wealth fund must allocate $5 billion across asset classes for a 10-year investment horizon. The fund's mandate requires preserving capital while maximizing long-term real returns to support future government obligations. The allocation decision must account for global economic uncertainty, interest rate regimes, and geopolitical risk over the decade.

Objective

Maximize expected 10-year terminal portfolio value. Values represent total portfolio value at the end of the 10-year horizon, ranging from $3B in worst case scenarios to $12B in the best outcomes.

The options

Option 1: Growth Portfolio (70% Equities, 20% PE, 10% Alternatives): Aggressive allocation targeting maximum returns. High equity exposure amplifies gains in boom periods but creates significant drawdown risk in recessions. If recession hits, the fund must decide: rebalance defensively ($75M cost), stay the course, or pursue opportunistic buying ($100M deployment).
Option 2: Balanced Portfolio (40% Equities, 40% Fixed Income, 20% Real Assets): Traditional institutional allocation balancing growth and income. Fixed income provides downside protection while equities and real assets drive returns.
Option 3: Defensive Portfolio (20% Equities, 60% Fixed Income, 20% Gold/Commodities): Capital preservation focus. Heavy fixed income weighting with commodity hedge. Sacrifices upside for stability and inflation protection.
Option 4: Infrastructure-Heavy (50% Infra, 30% RE, 20% Equities) - $50M Cost: Illiquid real asset strategy with $50M additional management/setup cost. Infrastructure assets provide inflation-linked cash flows but create liquidity risk. If recession occurs, the fund faces a difficult choice: hold illiquid assets, sell at a discount ($200M haircut), or double down ($150M).

The decision tree

The tree has 3 decisions, 23 chance events and 54 outcomes. The best path is open: at every decision the best choice is marked, and the expected value beside each branch counts every cash flow from the start. Open any other branch to see what follows it.

DecisionChance event+$ cash flow on the branch

Decision: SWF 10-Year Allocation

Growth Portfolioexpected $7,325,500,000 ✔ best
Chance: Global Economic Regime
- 20% Boomexpected $11,075,000,000
  Chance: Interest Rate Env (Boom)
  - 50% Rising Rates +$10,500,000,000payoff $10,500,000,000
  - 35% Stable Rates +$11,500,000,000payoff $11,500,000,000
  - 15% Falling Rates +$12,000,000,000payoff $12,000,000,000
- 40% Normal Growthexpected $7,920,000,000
  Chance: Interest Rate Env (Normal)
  - 35% Rising Rates +$7,200,000,000payoff $7,200,000,000
  - 40% Stable Rates +$8,000,000,000payoff $8,000,000,000
  - 25% Falling Rates +$8,800,000,000payoff $8,800,000,000
- 25% Recessionexpected $5,850,000,000
  Decision: Recession Response (Growth)
  - Rebalance to Defensive −$75,000,000expected $5,320,000,000
    Chance: Geopolitical Stability
    50% Stable +$5,800,000,000payoff $5,725,000,000
    35% Moderate Tension +$5,200,000,000payoff $5,125,000,000
    15% Major Disruption +$4,500,000,000payoff $4,425,000,000
  - Stay the Courseexpected $4,700,000,000
    Chance: Geopolitical Stability
    50% Stable +$5,500,000,000payoff $5,500,000,000
    35% Moderate Tension +$4,200,000,000payoff $4,200,000,000
    15% Major Disruption +$3,200,000,000payoff $3,200,000,000
  - Opportunistic Buying −$100,000,000expected $5,850,000,000 ✔ best
    Chance: Geopolitical Stability
    50% Stable +$7,500,000,000payoff $7,400,000,000
    35% Moderate Tension +$5,000,000,000payoff $4,900,000,000
    15% Major Disruption +$3,000,000,000payoff $2,900,000,000
- 15% Crisisexpected $3,200,000,000
  Chance: Geopolitical (Crisis)
  - 40% Stable Geopolitics +$3,500,000,000payoff $3,500,000,000
  - 60% Compounding Instability +$3,000,000,000payoff $3,000,000,000
Balanced Portfolioexpected $6,550,000,000
Chance: Global Economic Regime
- 20% Boomexpected $8,560,000,000
  Chance: Interest Rate Env (Boom)
  - 50% Rising Rates +$8,200,000,000payoff $8,200,000,000
  - 35% Stable Rates +$8,800,000,000payoff $8,800,000,000
  - 15% Falling Rates +$9,200,000,000payoff $9,200,000,000
- 40% Normal Growthexpected $7,210,000,000
  Chance: Interest Rate Env (Normal)
  - 35% Rising Rates +$6,800,000,000payoff $6,800,000,000
  - 40% Stable Rates +$7,200,000,000payoff $7,200,000,000
  - 25% Falling Rates +$7,800,000,000payoff $7,800,000,000
- 25% Recessionexpected $5,440,000,000
  Chance: Interest Rate Env (Recession)
  - 15% Rising Rates +$4,800,000,000payoff $4,800,000,000
  - 35% Stable Rates +$5,200,000,000payoff $5,200,000,000
  - 50% Falling Rates +$5,800,000,000payoff $5,800,000,000
- 15% Crisisexpected $3,960,000,000
  Chance: Geopolitical (Crisis)
  - 40% Stable Geopolitics +$4,200,000,000payoff $4,200,000,000
  - 60% Compounding Instability +$3,800,000,000payoff $3,800,000,000
Defensive Portfolioexpected $5,633,000,000
Chance: Global Economic Regime
- 20% Boomexpected $6,175,000,000
  Chance: Interest Rate Env (Boom)
  - 50% Rising Rates +$6,200,000,000payoff $6,200,000,000
  - 35% Stable Rates +$6,000,000,000payoff $6,000,000,000
  - 15% Falling Rates +$6,500,000,000payoff $6,500,000,000
- 40% Normal Growthexpected $5,770,000,000
  Chance: Interest Rate Env (Normal)
  - 35% Rising Rates +$5,800,000,000payoff $5,800,000,000
  - 40% Stable Rates +$5,600,000,000payoff $5,600,000,000
  - 25% Falling Rates +$6,000,000,000payoff $6,000,000,000
- 25% Recessionexpected $5,540,000,000
  Chance: Interest Rate Env (Recession)
  - 15% Rising Rates +$5,000,000,000payoff $5,000,000,000
  - 35% Stable Rates +$5,400,000,000payoff $5,400,000,000
  - 50% Falling Rates +$5,800,000,000payoff $5,800,000,000
- 15% Crisisexpected $4,700,000,000
  Chance: Geopolitical (Crisis)
  - 40% Stable Geopolitics +$5,000,000,000payoff $5,000,000,000
  - 60% Compounding Instability +$4,500,000,000payoff $4,500,000,000
Infrastructure-Heavy −$50,000,000expected $6,886,750,000
Chance: Global Economic Regime
- 20% Boomexpected $8,890,000,000
  Chance: Interest Rate Env (Boom)
  - 50% Rising Rates +$8,500,000,000payoff $8,450,000,000
  - 35% Stable Rates +$9,200,000,000payoff $9,150,000,000
  - 15% Falling Rates +$9,800,000,000payoff $9,750,000,000
- 40% Normal Growthexpected $7,450,000,000
  Chance: Interest Rate Env (Normal)
  - 35% Rising Rates +$7,000,000,000payoff $6,950,000,000
  - 40% Stable Rates +$7,500,000,000payoff $7,450,000,000
  - 25% Falling Rates +$8,200,000,000payoff $8,150,000,000
- 25% Recessionexpected $6,205,000,000
  Decision: Recession Response (Infra)
  - Hold Illiquid Assetsexpected $5,370,000,000
    Chance: Geopolitical Stability
    50% Stable +$6,000,000,000payoff $5,950,000,000
    35% Moderate Tension +$5,200,000,000payoff $5,150,000,000
    15% Major Disruption +$4,000,000,000payoff $3,950,000,000
  - Sell at Discount +$4,000,000,000payoff $3,950,000,000
  - Double Down on Infra −$150,000,000expected $6,205,000,000 ✔ best
    Chance: Geopolitical Stability
    50% Stable +$8,000,000,000payoff $7,800,000,000
    35% Moderate Tension +$5,500,000,000payoff $5,300,000,000
    15% Major Disruption +$3,200,000,000payoff $3,000,000,000
- 15% Crisisexpected $3,850,000,000
  Chance: Geopolitical (Crisis)
  - 40% Stable Geopolitics +$4,500,000,000payoff $4,450,000,000
  - 60% Compounding Instability +$3,500,000,000payoff $3,450,000,000

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Key assumptions

Assumption	Value	Notes
Initial Allocation	$5,000,000,000	Total fund capital to be deployed
Investment Horizon	10 years	Strategic allocation review cycle
Boom Probability	20%	Strong global growth, rising asset prices
Normal Growth Probability	40%	Moderate GDP growth, stable markets
Recession Probability	25%	Economic contraction, market stress
Crisis Probability	15%	Severe downturn with systemic risk
Infrastructure Mgmt Cost	$50,000,000	Illiquidity premium and setup costs
Rebalancing Cost (Growth)	$75,000,000	Transaction costs to shift defensive
Opportunistic Buying	$100,000,000	Additional capital for distressed assets
Terminal Value Range	$3B - $12B	10-year portfolio outcomes
Growth Best Case	$12,000,000,000	Boom + falling rates scenario
Defensive Worst Case	$4,500,000,000	Crisis + compounding instability

The figures are illustrative: the companies and numbers are invented for teaching.

Try it in ModelChoice

Strategy Table. Compare growth vs balanced vs defensive vs infrastructure
Sensitivity Analysis. Impact of recession probability on optimal allocation
Risk Profile. Downside exposure across economic regimes
Two-Way Sensitivity. Recession probability vs crisis probability

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An illustrative example: the figures are invented for teaching. Last updated 9 October 2026.