Five key themes noted in SWF Study

Five key themes have been highlighted through answers provided by sovereign investors and central bank reserve managers for the sixth Invesco Global Sovereign Asset Management Study.

They include: equity allocations and portfolios, private markets, fees and cryptocurrencies, according to Alexander Millar, head of EMEA Sovereigns, head of UK Institutional Business at Invesco.

Equities remain important for future, long term savings of sovereigns, he said, including across the range of investors, such as liability driven and others. The asset class is seen as a good way to add risk, but they are also accessing equities in different ways, for example, considering where to use active, where to use passive, and factor-based approaches.

But, while the overall study found an increase in exposure to equities, there are also concerns about valuations, in light of developments such as trade wars. That said, investors are being paid to stay in equities, which means that despite being aware of the risks, there is no firm trend towards cutting back on exposure, Millar said.

Private markets are another area of interest. With allocation ratios hitting some 20%, the Study has found an all-time high this year. However, the deployment into this area remains challenging, with often a decision to keep funds in equities before deploying it into private investments.

There are interesting opportunities, however, such as in lending, where the sovereign investors surveyed noted that banks have pulled back, leaving an opening for private equity. The private investment space is seen as a way to achieve diversification, income generation and an element of downside protection.

Fess are another key theme noted in the Study results. The sovereign investors exhibit what Millar describes as “a clear-headed approach” to fees, including the ability to negotiate not just the lowest fees, but a way to recognise value generated above and beyond beta. Sovereign investors remain happy to reward this, but want to see value and alignment between their own interests and performance fees, Millar said.


SWF study

With central banks among those being surveyed, it is perhaps not surprising that the Study highlights the interest in foreign currency reserves – some $12trn worth. But within this there is also intense interest in cryptocurrency developments. Sovereign investors are not investing in these yet, apart from a handful of venture allocations. But that said, cryptocurrencies are being tracked and evaluated, for example, by central banks interested in the underlying blockchain technology, Millar noted.


Speaking further about the findings, and how they may relate to sovereign investors based in Europe more particularly, Millar said that with the ongoing low yield environment, these investors still see equities as the main driver of returns. But the risks identified may have shifted. Valuations remain as the suggested biggest concern when it comes to equities, but geopolitical risk has risen up the agenda, thereafter it is concern around, for example, central bank stimulation, inflation and so on.

With little likelihood of a ‘crash’ seen in the near term, there are concerns about relative valuations, along with some concern over the late cycle in the US.

There is, however, some geographic divergence on equities. Emerging markets and Asia Pacific are seen as being in different stages of the economic cycle versus the US. There are also some variations in the use of active versus passive, with Asia and to a degree Europe exhibiting grater likelihood of using active management, Millar said.

On the Brexit question, this was a factor behind a significant fall in the relative attractiveness of the UK in last year’s Study. This year it is viewed more as part of the overall question of geopolitical risk.

In terms of alternative investments, sovereign investors in the US tend towards private equity, property and private credit, compared to Europe and EMEA, as against Asia, where there is more focus on infrastructure, the Study’s findings also suggest.

Overall, the Study represents some $17trn of assets, and encompassed 126 sovereign investors. The 62 central banks included in this was a significant step up from 35 in the previous, 2017, Study and reflects the increasingly importance that such institutions have as sovereign investors, Millar noted.

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