Sovereign Funds Allocate 21% to Alternative Investments – the Highest in Five Years

December 2, 2019 | Special Reports
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A study shows sovereign wealth funds have taken shelter in bonds and private market assets in 2019.

Invesco presented its study of 139 sovereign wealth funds at Investment Magazine’s Fiduciary Investors Symposium. The Invesco Global Sovereign Asset Management Study 2019 shows these investors raised allocations to fixed income and alternative investments during 2019.

However, they reduced their exposure to listed equities.

Shifting allocations reflect macro concerns

Allocations show that Europe is not a favored investment destination because of slowing economic growth and heightened political risk. However, Europe’s loss has been emerging markets’ gain, especially China.

The biggest worries for these giant funds? Trade wars, Brexit, and the perceived lack of monetary policy tools to address another crisis.

“Ageing cycle sees sovereigns defend, diversify and explore new opportunities,” the report added. Sovereigns are preparing for the end of the economic cycle with allocations to fixed income rising.”

Notably, China saw better allocations despite the overhang of trade disputes and the lack of transparency and familiarity with the law.

“Despite the obstacles, large-scale sovereigns are making active, long-term strategic decisions to invest in a number of Chinese asset classes, primarily equities, and real assets, and to a lesser degree fixed income,” the study found.

ESG is gaining traction as it becomes clearer how to derive value from its application.

Further, though sovereigns were well abreast in their role as technology investors, they were less so as technology adopters.

“Sovereigns have prioritized technology as a tool to drive operational, risk, and investment process improvements, but many acknowledge they still have far to go to integrate technology into their portfolios fully,” the study found.

Allocations – 2019

The 139 sovereign funds covered in the study represented over US$20 trillion in assets as of March 2019. The study has broadened its coverage from just traditional sovereign funds and central banks. It now includes state-based pension or superannuation funds.

Fixed income accounted for 33% compared to 30% in 2018. Bonds are now the largest asset class for these funds.

The sovereigns have 21% of assets in alternative investments. This is the highest allocation to this asset class in five years. “Within alternative allocations, private equity and real estate continue to be the largest sub-sectors, and registered further increases in 2019, with real estate the biggest beneficiary of expanded allocations,’ the report said.

However, allocations to equity were at 30%, down from 33% in 2018.

A growing sense of foreboding from “major shifts.”

The study found that 89% of sovereigns expect the current economic cycle to end within two years. “How do you prepare and be ready when major shifts occur,” said Lisa Gray, chief executive of Victorian Funds Management Corporation.

“You don’t know how fast they will happen or what the fallout will be or how to communicate with stakeholders,” she said, speaking after the presentation.

[Related Story: Refinitiv: Sovereign Wealth Funds Put $24.6 Billion into Q3 M&A Deals   ]

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