Asset Management
Sovereign Investors Put "Strong" Flows To Emerging Markets, Want To Raise Alternatives
A survey by Invesco of “sovereign investors” – such as the huge funds that governments have created from energy revenues – shows strong inflow to emerging markets and a desire to hold more "alternative" areas such as infrastructure.
A survey by Invesco of
“sovereign investors” – such as the huge funds that governments
have created from energy revenues – shows strong inflows into
emerging markets despite a marked preference in general for
developed economies. They also show a long-term desire to push up
allocation to alternative areas such as hedge funds and
infrastructure.
The poll, conducted among over 50 individual sovereign investors
collectively holding financial firepower of $5.7 trillion, showed
that areas such as China, Latin America and Africa are “winners
of new global sovereign flow”.
While they are collective, government-run entities (and often
opaque in terms of their accounts), sovereign investment entities
can be similar to very large family offices and other
institutions run for wealthy individuals, in that they can get
access to otherwise hard-to-enter asset classes, and tolerate
illiquidity if it means the chance of associated returns.
Therefore, studies of what such sovereign investors do and think
can find echoes in the private wealth management space.
Almost half (46 per cent) of sovereign investors expect to see an
increase in new funding in 2014 beyond the levels seen in 2013,
with clear implications on global capital flow.
Alternative positions
On a net respondent view basis, slightly more than half (51 per
cent) of investors increased new exposure to real estate in 2013
and 29 per cent did so to private equity, relative to the total
portfolio. Investors expect to increase new allocations across
all major alternative asset classes in 2014 based on net
responses – real estate, private equity, infrastructure, hedge
funds and commodities - relative to their 2013 asset
placements.
Even so, many sovereign investors remain underweight in
alternatives relative to their strategic asset allocation
targets, Invesco said. They have increased their target
allocations for alternatives in the past five years and had yet
to reach these targets. Secondly, many sovereign investors (46
per cent) expect funding levels to increase in 2014 relative to
2013. A large increase in assets encourages more strategic
allocation placements since allocating significant assets
tactically could lead to breaching internal guidelines.
Rising hunger for holding property, hedge funds and private
equity among other alternatives is part of a strategic, not
tactical, shift in how to slice and dice assets, the report said.
In recent years, alternative assets have in some ways
underperformed, with sovereign investors reporting average
returns of 7 per cent for these areas in 2013, versus a target of
8 per cent. This suggests a rise in exposure is part of a
strategic longer-term approach.
“However, the main reason is that many sovereign investors,
especially those with assets in excess of $50 billion, are seeing
it take time to deploy assets in alternatives and emerging
markets and are yet to reach the asset allocation targets set
five years ago,” Nick Tolchard, co-chair of Invesco’s Global
Sovereign Group and head of Invesco in the Middle East, said.
Within alternatives, global infrastructure was particularly
popular, with 47 per cent of respondents logging an increase in
exposure to new global infrastructure in 2013 relative to their
portfolio on a net respondent view basis, compared to 22 per cent
in 2012.
Emerging
The report said respondents to the survey are underweight in
emerging markets relative to their strategic asset allocation
targets, giving them more room to increase new exposure to the
regions. This long term structural trend to emerging markets does
not appear to have been influenced by the fact that emerging
market equities underperformed developed market equities during
2013.
“There are some exceptions where tactical asset allocation
strategies are at play, such as Central Eastern Europe and
Russia. These are the only emerging markets to which weightings
declined on a net respondent view basis in 2013 and to which
respondents expect exposure to remain flat going forward into
2014, primarily due to political instability,” the report
said.
Invesco sets out average sovereign investor ratings for economic
performance, private sector attractiveness and attractiveness for
the top-10 economies based on size. In terms of attractiveness to
sovereign investors, the perceived average economic performance
rating for developed and emerging markets are comparable, however
there is significant variation in the overall attractiveness of
the economies for sovereign investors, ranging from 4.9 (India),
to 7.2 (Germany) and 7.4 (UK).
A sign of greater risk appetite, as measured by willingness to
invest outside the sovereign investor’s home nation, is also seen
in the survey.