Sovereign wealth funds increased their exposure to alternative investments over the past year with more than half adding to their allocation, research by Invesco shows.
The second annual Invesco Global Sovereign Asset Management Study found 51% of sovereign investors increased new exposure to real estate in 2013 and 29% to private equity, relative to the total portfolio. Furthermore, sovereign investors expect to increase new allocations across all major alternative asset classes in 2014, including real estate, private equity, infrastructure, hedge funds and commodities.
Conducted among more than 50 sovereign investors worldwide, representing $5.7trn of assets, the study also found emerging markets including Latin America, Africa and China saw greatest inflows in terms of global equities, despite a fundamental preference, relative to the total portfolio, for developed markets.
Invesco said these geographical and asset class shifts could be attributed to the influence of strategic asset allocation over tactical asset allocation in influencing investment strategy and driving investment decisions of global sovereign investors.
One influencing factor for this is the expectation of new funding, the company added. Almost half (46%) of sovereign investors expect to see an increase in new funding in 2014 beyond the levels seen in 2013, with clear implications on global capital flow.
Invesco Global Sovereign Group co-chair and head of Invesco Middle East, Nick Tolchard, said: “Given alternatives underperformed during the period in which their allocations increased, it is clear that a strategic asset allocation strategy is driving sovereign investors to alternatives, rather than tactical allocation.
“The expected net increase in new funding this year is another key factor that explains this preference for alternatives, driven by increasing country surpluses and strong support from governments for their sovereign funds. However, the main reason is that many sovereign investors, especially those with assets in excess of $50bn, are seeing it take time to deploy assets in alternatives and emerging markets and are yet to reach the asset allocation targets set five years ago.”
Invesco said sovereign investors are generally underweight in emerging markets relative to their strategic asset allocation targets, giving them more room to increase new exposure to the regions. This long term structural trend to emerging markets does not appear to have been influenced by the fact that emerging market equities underperformed developed market equities during 2013, the report added.
Developed markets remain the preferred choice, however, with the UK considered the most attractive international market to sovereign investors globally.
“Despite allocations to emerging markets set to increase, a strong underlying preference for developed markets is still apparent, with sovereigns attracted by their depth, stability and diversification benefits, the latter of particular importance to sovereign investors based in emerging or frontier markets,” Tolchard said.
“Various factors determine sovereign geographic allocations – most notably political stability, openness of a country to sovereign investment, strength of shareholder rights, level of private ownership, and government relationships.
“The UK’s attractiveness can be attributed to its perceived political and economic stability, openness to foreign investment, and sovereign investors are attracted by the alternative investment opportunities offered in the UK.”
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