Sovereign wealth funds (SWFs) are shifting their asset allocations toward private and emerging markets while reducing the exposure to listed and developed-market investments over the past three to five years, according to the white paper.
The joint study by the International Forum of Sovereign Wealth Funds (IFSWF) and its research partner State Street examined how SWFs were keeping up with the post-crisis financial markets.
One of the key findings of the report was a growing focus of SWFs on private markets, including private equity, real estate and infrastructure and which represented one of the key changes in their asset allocation.
According to State Street’s academic affiliate and senior managing director and global head, Will Kinlaw, the funds began to recognise their long investment horizons represented an advantage and what was appealing based on monthly returns might look less attractive over the long-term.
The paper also proved that none of the SWFs had increased their allocation to foreign government bonds and half of the interviewed funds had reduced their exposure. Japan, the US and UK were the three leading countries for SWFs investments. Additionally, funds allocating their assets to Asia, including Australia and Japan, focused on three major asset classes: listed equities (90 per cent), government bonds (70 per cent) and corporate debt in the region (60 per cent).
Also, one-fifth of the funds had generally increased their exposure in Asia, with a further 70 per cent planning to do so in the near future.
Another trend indicated a substantial expansion across the funds’ alternative, unlisted and private investment portfolios.
Over the past three to five years, the funds also grew their exposure to emerging markets with none of them planning any significant reduction in this area in the near future.
“One of the biggest findings from this research is the growing focus on private markets,” Kinlaw said.
“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 key reasons why private markets were drawing increased attention of the SWFs were their long-dated liabilities, which meant that the funds could benefit from the illiquidity premium that these assets offered, while private markets were less efficient and therefore presented more opportunities for return.
Also, SWFs cited a range of factors that led to success in these 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.
