Globally, sovereign investors have enjoyed the hefty returns stemming from almost a decade of charging equity markets, but they’re set to make major moves into alternatives going forward, according to Invesco’s latest study.
The study, which surveyed 126 sovereign investors and central bank reserve managers representing $17 trillion in assets, found an average equity return of 8.7 per cent in 2017, with the asset class overtaking fixed income. Allocations, on average, were 33 per cent in 2017, up from 29 per cent the previous year. As such, sovereign investors have incrementally become overweight equities. While some are content to remain so, others noted it might be time to ease up, with 35 per cent of respondents stating they’re planning to reduce their equity holdings over the medium term.
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Sovereign investors are also changing the way they’re allocating equities, according to the study, with both passive management and factor investing making strides. Indeed, 45 per cent of investors moved at least some capital from active strategies to either passive or factor investing in 2017. This has been strongest among sovereign investors in the West, while 65 per cent of those in the Middle East remain loyal to active management strategies.
“While sovereigns remain increasingly committed to equities as a core growth asset, there has been a real shift within these equity portfolios,” said Alex Millar, head of Europe, the Middle East and Africa sovereigns and head of U.K. institutional business at Invesco, in a press release. “Although passive strategies have been major beneficiaries, it is far more nuanced than a movement from active to passive; portfolio traffic is actually moving in multiple directions. Looking forward, factor strategies are the clearest winners, with sovereigns seeing factor as a third pillar between traditional active and passive management.”
In a further shift, the average allocation to alternatives has doubled over the past five years, according to the study, reaching an all-time high of 20 per cent in 2017. Private equity and real estate are the most popular options, with infrastructure also gaining ground.
Read: Global investors increasing allocations to infrastructure, real estate: survey
“Private markets are favoured by many sovereign investors thanks to the long-term and illiquid nature of many asset classes within this market,” said Millar. “However, putting money to work in private markets has been a consistent challenge for sovereign investors, and as a result many remain underweight. Good opportunities are seen in infrastructure and in private credit, but respondents are seeing fewer attractive opportunities in private equity because of increased competition for assets and bidding up of prices. Over three-fifths (61 per cent) of respondents raised concern that private equity is becoming overvalued.”
The study also found that sovereign investors are continuing to shake off their home biases. Two-thirds (64 per cent) of respondents said Asia-Pacific is the most attractive region for infrastructure investments compared to 41 per cent that said the same for North America. For private credit, North America, Europe, the Middle East and Africa are the favourites, with 83 per cent of investors in agreement that the regions are attractive.
“Our study has once again highlighted how diverse sovereign investors’ investment strategies are and their increasing willingness to think globally in terms of finding the right assets for their portfolios,” said Millar. “With sovereign investors seeing particularly strong outcomes over the past year, there is likely to be further evolution over the next 12 months as they become increasingly more sophisticated.”
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