SWFs bet on alternatives, emerging markets

Sovereign wealth funds globally still strive to hit prescribed allocation targets to emerging markets and alternative assets.

Despite a fundamental preference for developed markets in sovereign wealth funds’ portfolios, emerging markets are still winning capital from these institutions, according to the Invesco Global Sovereign Asset Management Study released this week, surveying 50 sovereign investors globally representing $5.7 trillion in assets under management.

According to the report, 46 percent of SWFs expect to increase their funding levels to emerging markets, including Latin America, Africa, China, India and Emerging Asia, with 41 percent expecting to keep the same and just 12 percent saying they will decrease their allocations.

Moreover, respondents appear to favour alternative assets globally, particularly private equity and real estate, with most increasing their allocations to these asset classes.

About 29 percent  of sovereign investors increased new exposure to private equity last year, with 51 percent doing the same in real estate in 2013. Sovereign investors expect to increase new allocations across all major alternative asset classes in 2014, including private equity, real estate, infrastructure, hedge funds and commodities – relative to their 2013 commitments.

“Analysis of the findings suggests this continued appetite for alternatives is a structural trend driven by the influence of allocating assets strategically, rather than a short term shift due to tactical allocations to boost short term returns,” the report explained.

While many sovereigns remain underweight in alternatives relative to their strategic asset allocation targets, they had increased their target allocations to alternatives in the past five years but have not yet reached their targets. Many sovereign investors (46 percent) therefore expect funding levels to further increase in 2014.

Moreover, sovereign investors typically cited an average return of 7 percent for alternatives in 2013, compared to a target of 8 percent, indicating that increasing their exposure to these asset classes is a long-term, strategic decision, rather than a short-term move.

“Given alternatives underperformed during the period in which their allocations increased, it is clear that a strategic asset allocation strategy is driving sovereign investors to alternatives,” Nick Tolchard, co-chair of Invesco's global sovereign group, said in a statement.

“The expected net increase in new funding this year is another key factor that explains this preference for alternatives, driven by increasing country surpluses and strong support from governments for their sovereign funds. 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.”