Sovereign funds look to defend and diversify
Sovereign wealth funds have upped their investment in bonds and private market assets as the world’s biggest investors move to defend and diversify their portfolios against a weakening economy.
Fixed income allocations rose to 33 per cent this year from 30 per cent in 2018, and from 29 per cent the year before, according to a new study of 139 sovereign wealth funds commissioned by Invesco and presented by Martin Franc, chief executive, Invesco Australia at Investment Magazine’s Fiduciary Investors Symposium.
“The study has expanded from traditional sovereign funds and central banks to what we call quasi sovereigns or state-based pension or superannuation funds across the globe,” he said.
Bonds are now the biggest asset class for the sovereign wealth funds which collectively represent US20 trillion of asset, the survey found. Meanwhile, allocations to listed equities, fell to 30 per cent this year, from 33 per cent in 2018.
Sovereign investors now have 21 per cent allocated to alternative investments (or 32 per cent when including excluding direct strategic investments) reaching the highest level in five years, according to the survey,
“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.
Sovereigns are shying away from Europe due to perceptions of increased political risk and slowing economic momentum, leading to increased interest in emerging markets, particularly China, FIS delegates heard.
The investment giants achieved returns of 4 per cent on average last year, roughly half of the 9 per cent posted for 2017, due to weaker stock markets. About a quarter of state funds reported a negative return with those having higher allocations to passive equity strategies being worst hit.
The study revealed that the other big themes in 2019 included the implications of rapid technology change as well as the challenge of incorporating ESG considerations into investment processes.
Unsurprisingly, trade wars and Brexit emerged as the biggest concerns with a lack of monetary policy tools also seen as a risk, said Mark Fox, senior consultant, at NMG Consulting which carried out the research.
Despite concern over US-China trade tension sovereign funds continue to increase their exposure to China even while recognising the unique risk with investing in those markets.
After the presentation Lisa Gray, chief executive of Victorian Funds Management Corporation said while building resilience in portfolios is a hardly unique idea, it has become critical in the current roller-coaster environment. “How do you prepare and be ready when major shifts occur,” she said. You don’t know how fast they will happen or what the fallout will be or how to communicate with stake holders,” she said.
“We know we are later in cycle how do we think differently about asset allocation awareness and that is a different conversation with stakeholders.”
Gray told delegates that the VFMC was honing its ‘fire drill’ capabilities to heighten the fund’s readiness and preparedness for unexpected events.
“If something happens, everyone needs to know who needs to be involved, who should communicate with whom,” she said.