The ninth annual Global Sovereign Asset Managers Survey, conducted by asset manager Invesco, shows that sovereign wealth funds and central banks have shifted more money into equities and expanded their investment horizons. It is also notable that, according to Rod Ringrow, head of official institutions at Invesco, many have increased their investments in China while taking ESG more seriously.
More equities
The past year has seen significant changes in strategy among these players, Ringrow points out. For the first time since the survey was conducted, the weighting of fixed-income investments has decreased (from 34% to 30%) and money has shifted to equities (from 26% to 28%). They are doing this because they have nowhere else to go to generate returns today and government bonds pay almost nothing. Yet they are not doing so with all their enthusiasm, as three-quarters of these players find equity markets generally expensive.
In addition, because of the pandemic, there has been a need for liquidity, so the cash position has increased on average by 4 to 9 percent. Governments around the world have had to draw on their sovereign wealth funds to cover coronation deficits. Mostly liquidity funds (78 percent) and sovereign wealth funds (58 percent), mainly in emerging markets, were used to support governments.
At the same time, however, Ringrow points out that many SWFs pulled their weight during the severe market turmoil and continued to invest, especially in more illiquid alternatives such as real estate, infrastructure, etc., extending their investment horizon to more than 11 years. Never before has this figure been so high. For liquidity funds, which have a different role to play and need to generate cash quickly, this timeframe has remained unchanged at around 3 years.
After the great financial crisis of 2008, risk management for this group of investors improved dramatically. According to Ringrow, by better managing their risk profile and placing more emphasis on active management, they have been able to better respond to market opportunities in recent years and book additional alpha. When asked about the main risks facing the markets, they point to the impact of Covid, climate change and negative returns on government paper.
ESG to the forefront
Corona has given a big boost to ESG implementation at both government and central bank levels. As many as 64% of sovereign wealth funds now have an ESG investment strategy, up from 46% in 2017 - for central banks, the figure has risen from 11% to 38%, thanks in part to the issuance of green bonds and restrictions on fossil fuel investments.
Today, these players must be increasingly accountable to their stakeholders,” Ringrow points out. But it’s not always easy to integrate, especially for sovereign wealth funds in countries that depend on oil and gas exports. The One Planet Sovereign Wealth Group’s initiatives on how to integrate ESG factors are therefore a step in the right direction. In any case, the pandemic has accelerated everything.”
Sovereign wealth funds are also increasingly looking at climate change as a source of alpha. Since the market is not yet taking it sufficiently into account, many players are asking whether they can benefit from it, since they have resources and a long investment horizon, and whether these investments can help them achieve their ESG goals. They are starting to adopt a kind of impact investing philosophy and take a much more prominent position, whereas previously they were more on the sidelines.”
China’s growing importance
It is also striking that SWFs are turning to China in their quest for returns. Nearly half of the funds find China more attractive now than before the pandemic. 75% are looking to the country to generate higher returns. Half are looking to increase portfolio diversification and take advantage of the country’s growing economic importance. The most significant risks are perceived in geopolitical terms, and there is also room for improvement in ESG. Some investors are looking for more interaction with China. Everyone is on the same page on E, but opinions still differ on S and G.’ According to Ringrow, the latter will not be achieved in the near future. According to Ringrow, these will not disappear immediately.
Study
For the Global Sovereign Asset Manager Study, the opinions and views of 141 CIOs, asset class managers and portfolio strategists from 82 sovereign wealth funds and 59 central banks were sought. The respondents collectively have $19 trillion in assets under management. SWFs can be divided into two categories: liquidity funds, which are used by governments to meet budgetary needs and invest primarily in short-term (liquid) products, and sovereign wealth funds (SWFs). The latter mainly invest the proceeds from the sale of commodities such as oil and gas over the long term. Norway’s SWF is perhaps the best known.