Sovereign funds target emerging markets

State-owned wealth managers shift focus to alternative assets such as real estate and infrastructure from volatile equities and treasuries

PUBLISHED : Tuesday, 24 June, 2014, 5:58am
UPDATED : Tuesday, 24 June, 2014, 5:58am

Global sovereign investors made more investments in emerging markets last year and may continue to do so this year despite an underlying preference for developed markets, an annual study conducted by Invesco finds.

The favourite picks of sovereign investors are also increasingly shifting to alternative assets - real estate, private equity and infrastructure, among others - partly because of volatility in global equity markets and lower yields on treasuries, according to the Invesco Global Sovereign Asset Management Study released yesterday.

"This year's findings indicate short-term trends are driven by long-term strategic thinking and emerging markets, and alternatives are becoming firm fixtures in sovereign investors' strategic asset allocations despite a deep-rooted faith in developed markets that still remains," said Nick Tolchard, a co-chair of Invesco's Global Sovereign Group.

Invesco, a global investment management firm in Asia, conducted the annual study among 52 individual sovereign investors in the world, which between them held US$5.7 trillion (HK$44.2 trillion) of assets at the end of last year.

Sovereign investors are defined as state-owned players, including stand-alone sovereign wealth funds, central banks, state pension funds and government ministries.

China, Africa, Latin America, India and emerging Asia attracted more funds from sovereign investors last year, with the trend expected to continue this year, the study said.

"The fact that emerging market equities underperformed developed market equities during 2013 did not offset this long-term structural trend to emerging markets," it said.

Last year, emerging market equities trailed the aggregate world index by 29 percentage points. Among Asian sovereign investors, 67 per cent said they expected to increase allocations to Latin America this year, a rise from 40 per cent last year.

About 57 per cent of Asian investors said they were likely to increase allocations to China this year, compared with 43 per cent previously.

But the study found the developed markets remained fundamentally more attractive, thanks to their "depth, stability and diversification benefits". Even after excluding home-market allocations from sovereigns based in developed markets, 56 per cent of average sovereign investor portfolios were in developed markets.

Fifty-one per cent of sovereign investors boosted exposure to real estate last year while 29 per cent did so to private equity.

Investment in global infrastructure increased markedly, with a particularly clear trend in Asia, where 71 per cent of sovereigns raised allocations to the segment, a big jump from just about 50 per cent in 2012.

The strong demand for infrastructure assets was prompted mainly by the falling return on real estate amid growing demand, the study said.

In addition, risk-adjusted returns of investing in global infrastructure also appeared to be a key driver, it said.

About 46 per cent of sovereign investors, including 56 per cent of those in Asia, said they anticipated a rise in new funding this year.

Expected net increase in new funding this year, driven by increasing country surpluses and strong support from governments for their sovereign funds, was also a key factor that explained the preference for alternatives, Tolchard said.