Sovereign wealth funds (SWFs) are making big moves back into active management as they fret over index concentration and geopolitical upheaval, according to the latest edition of Invesco’s Global Sovereign Asset Management Study.

The report reveals that more than half of SWFs expect to increase their active equity exposure over the next two years, with the pivot particularly pronounced among larger institutions: 75 per cent of SWFs managing more than US$100 billion reported a move towards more active strategies over the past two years, compared to 43 per cent of midsized funds and 36 per cent of smaller institutions.

“The disparity partly reflects implementation realities: larger SWFs can more easily pivot by building internal active management capabilities, while smaller institutions often face the added complexity of sourcing and onboarding specialised external managers to execute these strategies,” the Invesco report says.

Index-concentration risk is a significant driver for prioritising active management among SWFs, which are questioning “the diversification that passive exposure is assumed to provide”. One investor from an Asian SWF, anonymised for the report, said: “Passive works when markets are predictable. That’s no longer the case”.

But SWFs are also contending with geopolitical fragmentation, which is creating greater dispersion in market returns, and macro and political volatility that is “diminishing confidence in one-size-fits-all beta exposure”.

“For many SWFs, the decision is not framed as an either/or choice between active and passive, but rather as a strategic calibration based on market conditions, internal capabilities, and investment objectives. Most maintain significant allocations to both approaches, with the balance shifting in response to evolving market dynamics and institutional priorities.

“This shift is not about abandoning passive investing altogether. Instead, it involves supplementing broad index exposure with active strategies that can target underrepresented sectors, geographies, or factors and underweight dominant but potentially overvalued exposures.”

Future Fund the biggest proponent

Locally, the Future Fund has been the biggest proponent of active equity management, tipping money into small caps via Maple-Brown Abbott and Japanese equities through Wellington Management and secretive activist and event-drive hedge fund Effissimo Capital Management.

“Rather than viewing active management primarily as a vehicle for outperformance, institutions are increasingly positioning it as a strategic capability – one that provides the flexibility, precision and risk control needed to manage through structural uncertainty,” the report says.

“As market concentration increases, correlations shift, and geopolitical tensions reshape global capital flows, SWFs and central banks are recognising that traditional market-weighted passive exposures may introduce hidden vulnerabilities. Active management offers a potential path to more resilient portfolios.”

Divergent central bank policies, persistent inflation pressures, fiscal sustainability concerns and uneven liquidity conditions are also reinforcing the historical trend towards active management in fixed income as well.

“In this environment, passive duration exposure is increasingly seen as inadequate,” the report says.

“Institutions are therefore turning to active strategies to fine‑tune duration profiles, dynamically adjust credit exposure, and selectively capture opportunities in sectors or regions where market dislocations create pricing inefficiencies.

“This selective approach to fixed income is particularly evident in how institutions are navigating emerging market exposures, where idiosyncratic risks are high and broad passive exposure may introduce unwanted vulnerabilities.”

But SWFs are also facing down structural challenges to diversification, with the erosion of the negative correlation between stocks and bonds diminishing the effectiveness of fixed income as the workhorse diversification tool.

“With traditional bond-equity dynamics less reliable, many SWFs are turning to alternative strategies,” the report says.

“These include synthetic overlays that hedge against specific macro risks, systematic macro strategies that exploit global trends across asset classes, and greater allocations to hedge funds and alternatives, which offer differentiated return streams less tied to market direction.

“While these approaches may not always deliver outsized returns, they are increasingly valued for their ability to provide diversification in stressed market conditions.”