Risk asset flow to continue but no sign of bubble: report

Sovereign wealth funds and institutional investors are still holding 20% cash in their portfolios, suggesting more capital deployment to risk assets, a new report finds
Risk asset flow to continue but no sign of bubble: report

Institutional investor flows into risk assets will likely continue in 2021 as cash levels remain high, according to newly released research. And contrary to media reports, there is no evidence of bubble behaviour.

After taking cautious positions at the start of 2020, institutional investors have embraced a rotation to equities from cash and fixed income since July, and increased allocation to private markets, according to the report released on Wednesday (April 7) by State Street and the International Forum of Sovereign Wealth Funds (IFSWF).

Even so, “cash levels remain high and equity positions lower than normal … leaving room for further capital deployment and rebalancing towards risk assets,” according to the report, which drew its findings from seven of IFSWF’s largest members combined with State Street’s dataset of indicators that track portfolio positions of long-term institutional investors with $38 trillion in assets under management.

The research (see chart below) found that investors were still holding more than 20% in cash in their portfolios, leaving room for them to increase exposure further to risk assets.

“[Equity holdings] remain lower than pre-Covid-19 levels,” said Neill Clark, head of State Street Associates in the Europe, Middle East and Africa (EMEA) regions.

 “Cash allocations have been rising since 2016 and peaked during the first half of 2020, reaching its highest level observed since the Global Financial Crisis in 2009. Since last summer, cash allocations have continued to decline... There remains scope for this trend to continue in the near future since cash holdings still remain relatively high compared to the prior ten years,” he told AsianInvestor.

Asset class weights of institutional investors


Institutional investors and sovereign wealth funds were also found to have increased allocation to private markets. Despite a 10% drop in private equity returns in the first quarter of 2020, the market rebounded to record 10% gains in the next two quarters, led by venture capital investments.

Victoria Barbary, IFSWF

Sovereign wealth funds in particular had more than doubled exposures to unlisted companies from $22.2 billion in 2019 to $50.3 billion in 2020.

One unnamed sovereign wealth fund said in the report that “private equity had stellar return” and that it was focusing on early-stage ventures.

This trend is likely to continue, with most sovereign wealth funds looking specifically to build out their infrastructure and real estate portfolios.

“All but one of the seven SWFs we spoke to said they saw opportunities in private and real assets,” Victoria Barbary, director of strategy and communications, told AsianInvestor.

However, the research did not state which markets were most appealing, and IFSWF did not reveal forward-looking information. “We don't tend to predict what will happen in the future, given the uncertainties at the moment,” Dr Barbary said.


Despite the increase in allocations to equities and private markets, the report found no evidence of bubble risks.

The researchers looked mainly at institutional investor positions, specifically whether they had particularly extended their positions in risk assets, as evidence of bubble behaviour, Clark said.

These positionings are also measured with State Street’s behavioural risk scorecard (BRS), which indicated that “while institutional investors have closed their underweight positions in risky assets in aggregate during the course of 2020, we currently remain reasonably distant from observing extended overweight positions,” Clark said.

“We note that the behaviour of institutional investors does not indicate the presence of asset bubbles due to this lack of positioning risk,” he added.

The sovereign wealth funds interviewed for the research also said they were not worried about asset bubbles but agreed that “portions of the global markets appear to be in or close to what one would consider bubble conditions” and that “financial assets do appear fully-priced to expensive”.

US financial stocks plunged as Covid hit the US, reaching a low index level of 94.84 in March last year, but has since doubled to 188.15 as of April 9, according to the MSCI US financials index.

Changed in sector holdings by institutional investors

One sovereign wealth fund also sounded a warning for “the number of SPAC [special purpose acquisition company], IPOs [initial public offerings], the number of technology companies trading at more than 20 times revenues, the multiples that private equity funds are paying for deals and the proportion of Russell 2000 companies that are unprofitable,” as quoted in the report.

Generally, however, sentiment is more optimistic this year than the last. The volatility and “unusual cross-sector correlations” have declined, which has reduced risks, the report said.

“Market risk – measured through our global equity turbulence index (which captures both volatility and unusual correlations across assets) and global equity systemic risk index (which captures risk concentration) have declined in recent months and since the outbreak of the Covid-19 pandemic,” Clark said.

“Taken together, these measures indicate a market environment that is often characterised by reduced tail risk.”

He added that measurements derived from asset prices, rather than specific themes such as the trends in Covid cases. But these event risks (such as Covid trends) “can be reflected through asset price dynamics as participants absorb new information and should be reflected in these objective measures of market risk.”

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