Research into asset allocation decisions by sovereign wealth funds in recent years has found that there has been a significant shift towards private rather than public equity, and growing exposure to emerging markets away from developed markets, according to State Street and the International Forum of Sovereign Wealth Funds (IFSWF).
The findings are released in two White Papers – Asset Allocation for the Short and Long Term, and Comparison of Members’ Experiences Investing in Public Versus Private Markets. State Street’s involvement came as it was appointed as an official research parter to the IFSWF Investment Practice Committee, which maintains an ongoing research programme.
On the research into asset allocation decision, the White Paper concludes that:
- None of the SWFs interviewed for the research increased their allocation to foreign government bonds and half had reduced their exposure to these securities;
- Half had increased their exposure to emerging markets, with none reducing their exposure to these geographies;
- As a group, these SWFs had substantially expanded their alternative, unlisted, and private investment portfolios. At least 30% of the surveyed group had invested more, and none of the respondents had reduced their exposure.
Will Kinlaw, senior managing director and global head of State Street’s academic affiliate, State Street Associates, said: “Much like all investors in today’s economic climate, SWFs are balancing traditional financial theory with the complexities presented by today’s real-world circumstances. They recognize that, in many cases, their long investment horizons represent an advantage, and they are seeking investments that will provide attractive long-term return, risk, and diversification properties. What looks appealing based on monthly returns may look much less so when the horizon is measured over multiple years.”
“One of the biggest findings from this research is the growing focus on private markets. Despite the allure of these investments, SWFs are aware of the potential risks, with illiquidity topping the list. However, many have invested considerable time and resource in assessing these markets and have clearly identified attractive opportunities here.”
The research into private versus public markets found that:
- SWFs often chose to enter private markets as they believed that their long-dated liabilities mean they can benefit from the illiquidity premium that these assets offer. They also thought that private markets are less efficient and, therefore, present more opportunities for return.
- Even though SWFs have been successful in private markets, many reported ongoing internal debate as to whether the return premium is fair compensation for the risks these types of investments add to the portfolio.
- SWFs cited a wide range of factors that led to success in private markets, including fostering a culture of long-term investing, attracting and retaining qualified staff, partnering with other SWFs, assigning multi-disciplinary due diligence teams, and proceeding slowly to keep pace with developing in-house capabilities.
- Of the SWFs interviewed for the paper, 50% said they had to make changes to their governance process to overcome challenges related to the speed of decision-making regarding private market opportunities