Sovereign funds were well prepared for the COVID-19 crisis, as they had learnt their lessons from the Global Financial Crisis (GFC) and implemented subsequent changes, an Invesco study has found.
The ‘Global Sovereign Asset Management Study’ found these changes had placed sovereigns in a good position to take advantage of unique buying opportunities.
The study found over the next 12 months sovereigns planned to continue allocating to fixed income; with 43% of respondents saying they aimed to increase their fixed income allocations, and another 43% planned to increase private equity and infrastructure. Another 38% admitted they would increase their allocations to real estate.
By comparison, before COVID-19 the average equity allocations for sovereigns at the end of 2019 were at their lowest level since 2013 both relative to fixed income and as an overall proportion of asset allocation: 26% (equities) vs 34% (fixed income).
According to Rod Ringrow, head of official institutions at Invesco, the crisis presented investors with new opportunities but investors were targeting mostly fixed income and illiquid alternatives, particularly infrastructure.
“Traditionally fixed income is seen as a defensive anchor and this was tested by the crisis with even US government debt caught up in a broad sell-off as investors rushed into cash. However, government interventions including rate cuts and global quantitative easing forced down yields and had a positive impact on many fixed income portfolios,” he said.
“Infrastructure projects, particularly electricity generation and transmission that help countries transition away from fossil fuels were seen as ways of fulfilling environmental, social, and governance objectives, however many pension funds also have this theme, so it can be a challenge for some of the medium sized sovereigns and those newer to the asset class to source the right investments.”
This year’s study also found that central banks and a small group of sovereigns increased their allocations to gold. On average, 4.8% of total central bank reserve portfolios were now being allocated to gold – up from 4.2% in 2019 – and almost half (48%) of those that increased their allocations did so with a view to it replacing negative yielding debt.
On top of that, the study revealed that 83% of central banks and sovereigns believed immediate action was required to combat climate change, and this was increasingly being translated into investment strategies with an understanding that climate-related risk should be embedded into the wider investment process.
The study examined the views of chief investment officers, heads of asset classes and senior portfolios at over 80 sovereign funds and 56 central banks.
