Sovereign investors’ appetite for risk assets such as alternatives and emerging market exposure is still rising, as they showed less interest in home markets last year. These institutions are also growing less concerned about the issue of recruiting/retaining talent, and are spending more time on benchmarking against and collaborating with their peers.
These were among the key findings of Invesco’s latest global sovereign asset management study, due for release today. Taking a wider sample of sovereign institutions this year – 52, accounting for $5.7 trillion in assets, compared to 38 in 2013 – the US fund house provides detailed findings on portfolio exposure shifts and how the segment is developing.
There was similar demand for alternatives this year to 2013. All the major alternative asset classes – real estate, private equity, infrastructure, hedge funds and commodities – were projected to increase on a net respondent view basis when sovereigns compared their forecast asset placements for 2014 with their 2013 actuals (see figure 1 below).
Notably, 51% increased their new exposure to real estate relative to the portfolio, 47% to global infrastructure and 29% to private equity, on a net respondent view basis.
Demand for global infrastructure and property assets is particularly high among Asian sovereigns, noted Nick Tolchard, London-based managing director of international development for sovereign investors and Middle East head at Invesco. They are further along the curve in terms of focusing on alternatives and in particular real assets, he told AsianInvestor.
“The growth in alternatives exposure is driven by strategic asset allocation targets and high levels of new funding,” said the report. “Sovereigns were seeking diversification, noting the volatility of equities, yield compression in treasuries and greater correlation between equities and corporate bonds due to quantitative easing.”
Emerging market appetite
Continued growth in EM allocations was also driven by strategic allocation targets, said the report. Leading the way in terms of popular investment destinations were Africa, Latin America, China, India and emerging Asia, in that order (see figure below). And many sovereign investors expect allocations to these regions to increase again in 2014 relative to 2013.
That said, there remains an overall preference for developed markets as a share of portfolios, and appetite for certain markets is particularly strong. The UK, for example was cited as having the highest ‘sovereign investor attractiveness’ in the survey this year.
The survey also indicated a shift more into global markets and away from home markets in most asset classes (see figure 1 above). On a net respondent view basis, 11% of sovereigns cut allocations to their home market.
One exception was in equities, where both domestic and global allocations rose. Exposure to home-market private equity and real estate was also forecast to increase.
Tolchard said this is representative of funding levels and development of expertise. “We’ve seen sovereign funds being used as deployers of national economic growth strategies, particularly in Asia and the Middle East,” he noted. “This incorporates strategic long-term plans for infrastructure development. After the global financial crisis in 2008 hit confidence in investing globally, these funds switched their focus to home markets."
Sovereign investors’ desire to boost expertise has also been a factor, particularly in private equity and infrastructure, added Tolchard. As they become better at in-house investing in their home markets, so they are likely to boost their exposure to domestic assets.
Respondents increasing exposure to alternatives typically cited a decrease in home-market fixed income or cash rather than global fixed income or equities. And respondents boosting allocations to emerging markets in 2013 typically cited a cut in home-market allocations rather than in developed markets.
Recruitment and retention
Finding and retaining staff continues to be an issue for sovereign investors, but is becoming less so, found the survey. Last year 37% of respondents cited people and talent as a challenge compared to 31% this year.
That said, only 20% of sovereigns said they are able to match private-sector remuneration and 9% believe packages are equivalent across the two segments, leaving most with a challenge in terms of absolute remuneration or the ability to construct long-term incentive schemes.
These challenges are particularly acute for smaller sovereigns with above-average allocations to risk assets or above average allocations to internal asset management, said Invesco. Recruitment and retention challenges were most prevalent in strategy units (with a focus on asset allocation, risk and benchmarks), followed by the manager selection process or underlying asset management.
Respondents said they are now more comfortable articulating their non-financial points of differentiation and are improving or expanding their partnerships with third parties for training and secondment.
“There’s a lot of focus on in-house capabilities,” said Tolchard, “and we expect to see more direct investment and co-investment taking place. There’s evidence of that in recent deals being done.”
Meanwhile, sovereign investors are also increasing their levels of collaboration in interacting with their peers, found the study.
Historically there has been limited interaction between sovereigns, noted Invesco, and most relationships are based on convenience (between sovereigns located in the same market or region) rather than driven by strategic objectives and challenges.
This year, however, 70% of respondents conducted some form of benchmarking against other sovereign funds compared to 53% in 2013. This increase was chiefly attributed to growing awareness, collaboration and transparency among sovereigns.
In addition, 28% of respondents cited a private-sector organisation as a benchmark, and Invesco expects this figure to increase.