Equities to stay dominant in SWF portfolios: Cerulli

Despite a growing appetite for alternative assets among Asia's large institutions, the region's biggest sovereign wealth funds will continue to favour equities above all, said the research house.
Equities to stay dominant in SWF portfolios: Cerulli

While Asia’s biggest institutions are increasingly investing in alternative assets, sovereign wealth funds’ allocations continue to be dominated by equities, and that situation is likely to continue, said research house Cerulli Associates.

But a shared penchant for equities has not resulted in uniform performance, the firm found in a new report, in which it focuses on Asia’s four largest SWFs: Singapore’s GIC and Temasek, Korea Investment Corporation (KIC), and CIC International, the unit of China Investment Corporation that invests offshore.

Temasek's allocation to listed securities was 70% last year, down from 73% in 2012 and 2011, and 78% in 2010, while KIC’s exposure to equities rose to 48.5% last year from 41.8% in 2010 (see figure 1).

Figure 1

Singapore’s sovereign wealth fund GIC boosted its equity allocation to 48% as of the end of March, up from 38% in March 2009.

However, the fund revealed in August that for a second consecutive year it had undershot two performance indicators and forecast a decade of weak financial market returns, as reported.

Despite this shared focus on listed equities, the four SWFs have reported mixed returns since 2009.

Last year CIC International and KIC reported returns of 9.3% and 9.1%, respectively, while GIC reported 4.1% and Temasek 1.5% (see figure 2), noted Cerulli, adding the caveat that the four funds calculate returns differently.

Figure 2

For example, KIC calculates its return on total assets under management, while Temasek uses a one-year total-return model.

Though Temasek performed the worst of the four last year, its returns look stronger over the longer term, at 9% a year over 10 years and 16% per year since it was incepted in 1974.

But the SWF with the steadiest returns since 2009 is GIC. “It is the quintessential long-term investor, and rarely gets flustered by short-term volatility in markets,” said Cerulli.

The returns of CIC and KIC since 2009 have shown some correlation, noted the report, which suggested the two are pursuing similar investment strategies.

Cerulli forecast that equities will remain dominant in portfolios after developed markets rallied last year.

“This is not unlike other institutional investors, who are looking to diversify their assets and seek higher returns,” said Cerulli analyst Evonne Gan, who led research for the report.

The firm noted that Asia’s SWFs engage in a comparatively high level of active trading, though it didn’t reveal how it quantified this.

Ng Sze Yoon, Asia research director at Cerulli, said star fund managers would likely see new allocations given SWFs’ expanding asset base, the challenging investment environment and the pressure on them to seek alpha.

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