SSgA points to further sovereign diversification

State Street Global Advisors expects to boost its $400 billion in sovereign assets under management, with Asia a key driver – despite a slowdown in the region's reserve growth.
SSgA points to further sovereign diversification

The incoming global head of official institutions at State Street Global Advisors is likely to have a major focus on Asia Pacific, given that the region accounts for the majority of sovereign assets globally and state entities are looking to diversify their portfolios.

Accordingly, Asia Pacific is thought to account for more than half the $400 billion in sovereign funds managed by SSgA globally, although the firm declined to confirm the figure.

Louis de Montpellier has joined SSgA in London from the Bank for International Settlements in Switzerland, where he was deputy head of the banking department. He replaces John Nugée, who will retire at the end of October but will remain a strategic consultant.

SSgA declined to say to whom de Montpellier reports or reveal the headcount of the official institutions group (OIG).

The division accounts for some 20% of SSgA’s $2.1 trillion in total AUM and caters to the needs of central banks, sovereign wealth funds and state pension funds.

More than $7 trillion of the world’s $12 trillion in foreign exchange reserves – which form the bulk of sovereign assets – are held in Asia Pacific, up from $5.7 trillion in 2010.

And only a relatively small proportion – some $600 billion – is needed for defending currencies against speculative attacks on Asia-Pacific currencies, notes Hon Cheung, Asia head of the official institutions group. He therefore sees significant potential for asset managers in tapping such capital.

“The recognition that there are significant surplus reserves and the cost of holding excess reserves in low-yielding assets is getting to be considerable,” says Cheung. “Not only because of negative carry, but also because the long-term appreciation of Asian currencies has created mark-to-market realised losses [against developed-market currencies].”

That said, he concedes that the expansion of reserves in Asia is not likely to continue at the same swift pace as it has in the past decade, but he still forecasts a healthy buildup.

And despite this slowdown in reserve growth, says Cheung, there remain plenty of opportunities for asset managers to help sovereign entities re-allocate into higher-yielding assets.

“Don’t forget, it’s not just about flows, it’s about inventory,” says Cheung. “That $7 trillion needs to be invested. Most of it is invested in low-risk assets like fixed income, and only a 1% re-allocation into equities means a $70 billion shift [into equities]. It’s vast.”

And as talk of diversification by central banks gains pace, Cheung notes rising interest from his clients about the euro and the eurozone, and vice-versa.

“We have clients in the Gulf and Europe who want to know about what central banks in Asia are doing and what is happening with the renminbi and the offshore China market, for example.”

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