State Street Corporation and the International Forum of Sovereign Wealth Funds (IFSWF), a global network of sovereign wealth funds, has released a report detailing a shift away from risky assets by large institutional investors.
The report looks at the aggregated activities of long-term institutional investors from 40 countries representing more than $43 trillion in assets under custody and administration at State Street.
It also includes insights from interviews with a selection of the world’s largest sovereign wealth funds across Central Asia, East Asia, West Asia, Australasia, and North America.
The report reveals institutional investors’ risk aversion in 2021, evidenced by the fact State Street’s Behavioural Risk Scorecard – an aggregate measure of risk appetite derived from the capital flows and holdings by institutional investors across multiple asset classes and factors – turned negative in early February 2022 and reached its lowest point in two years.
Institutional investors’ capital flow decisions had become more broad-based, with evidence of risk-off behaviour manifesting across investors’ equity, fixed income, foreign exchange and asset allocation decisions over recent months.
Neill Clark, head of State Street Associates, Europe, Middle East and Africa (EMEA) said: “As economies around the world emerged from the long shadow cast by the COVID-19 pandemic, investors are faced with new risks. Today, risk assets are re-pricing due to international conflict, inflation, and central bank policy responses.”
“Following a period of opportunistic rebalancing and selective risk-taking during 2020, the past year has seen institutional investors moving towards safer assets and markets. Their asset allocation decisions suggest they are no longer adding to their equity exposure – which they had been doing since Q1 2020 – and instead, are adding to their fixed-income and cash balances.”
The report revealed strong capital outflows from emerging markets – the largest level of selling observed over the previous five years – had been matched by robust demand for stocks in developed markets.
Duncan Bonfield, chief executive, ISFWF, said: “When it comes to the investment strategies of sovereign wealth funds, most are taking the long view, which can sometimes mean a contrarian stance.
“For example, one of our members has increased its emerging-market equity positions as the value/price gap widened, as emerging-market equity was cheaper than it was six months ago relative to its fair value estimates.”
In fixed income, the report revealed heightened geopolitical risk had seen capital outflows from emerging-market sovereign debt, while high-quality, developed-market sovereign bonds were maintaining stable capital inflows despite rising domestic inflationary pressures.
