Alternative investments continue to be winners of new global sovereign allocations, as do emerging markets — despite a fundamental preference for developed markets — according to a new study released Tuesday. Invesco’s second annual Invesco Global Sovereign Asset Management Study examined the investment behavior of sovereign investors across the globe.
The study was conducted among 52 individual sovereign investors, representing $5.7 trillion of assets, including standalone sovereign wealth funds, state pension funds, and central banks and government ministries.
New Allocations to Alternatives
Alternative investments remain the clear asset class winners in terms of new asset allocation within sovereign investor portfolios, mirroring the trend reported in the 2013 study.
On a net respondent view basis, 51% of sovereign investors increased new exposure to real estate in 2013 and 29% to private equity, relative to the total portfolio.
In fact, sovereign investors expected to increase new allocations across all major alternative asset classes in 2014: real estate, private equity, infrastructure, hedge funds and commodities.
Invesco said the findings suggested that this continued appetite for alternatives was a structural trend driven by the influence of allocating assets strategically, rather than a short-term shift owing to tactical allocations to boost short-term returns.
The study found three reasons for this.
First, many sovereign investors remain underweight in alternatives relative to their strategic asset allocation targets. These sovereign investors had increased their target allocations for alternatives in the last five years and had yet to reach these targets.
Second, 46% of sovereign investors expected funding levels to increase in 2014 relative to 2013. A large increase in assets encourages more strategic allocation placements since allocating significant assets tactically could lead to breaching internal guidelines, Invesco said.
The third reason that increasing appetite for alternatives should be attributed to strategic rather than tactical asset allocation is that alternatives underperformed during this period, with sovereign investors typically citing an average return of 7% for alternatives in 2013, compared with a target of 8%.
This indicates that increasing their overweight in these asset classes is a long-term, strategic decision, rather than a tactical move, according to the study.
Within alternatives, global infrastructure was particularly popular, with 47% of sovereign investors citing an increase in exposure to new global infrastructure in 2013, compared with 22% in 2012.
Furthermore, 53% of sovereign investors anticipated increasing allocations in 2014 versus 2013 allocations, as real estate yields continued to fall and global demand, especially for developed-market real estate, continued to grow.
The risk-adjusted returns offered through investing in global infrastructure also appeared to be a key driver.
Open to Emerging Markets, but Developed Markets Preferred
As observed in the 2013 study, the flow of new global sovereign assets continued to reach emerging markets with new allocations to Latin America, Africa, China, India and Emerging Asia all increasing in 2013, and expected to increase again in 2014.
As with alternatives, this trend appears to be largely driven by strategic allocation targets, the study found.
Sovereign investors said they were underweight in emerging markets relative to their strategic asset allocation targets, giving them more room to increase new exposure to the regions.