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Sovereign funds shift assets into reverse, turn to private debt
The 2024 Invesco global sovereign asset management study found sovereign wealth funds (SWFs) have made significant asset allocation shifts over the last year or so in light of sticky inflation and gathering geopolitical risks.
Respondents view persistently high inflation and interest rates as “having a profound impact on the valuation of various assets, especially those in growth-oriented industries and those with significant debt exposure”, the study says.
“As a result, this year’s survey reveals quite a notable reversal in certain allocation trends of recent years, with net increases expected for equities, infrastructure and commodities but net decreases for cash, as well as less liquid investments such as private equity and real estate.”
Year-on-year SWF fixed income allocations held steady at 28 per cent, the survey found, as the equities portion rose two per cent to 32 per cent.
“Illiquid alternatives accounted for 22 per cent of total assets, while liquid alternatives and direct strategic investments (DSI) stood at four per cent and 10 per cent, respectively,” the Invesco report says.
“Within alternative investments, private equity [PE] allocations decreased to 7.0 per cent from 7.4 per cent in the previous year, and real estate allocations fell to 7.6 per cent from 8.0 per cent. Conversely, infrastructure allocations rose to 7.7 per cent from 7.1 per cent, and hedge funds/absolute return funds increased to 2.9 per cent from 2.5 per cent in 2023. Commodities allocations remained relatively stable at 0.8 per cent.”
But while SWFs are cooling on PE, the sector is warming up to private debt, Rod Ringrow, Invesco head of official institutions, says in the report.
“Over half of SWFs are now investing in private credit, with most planning to increase allocations,” Ringrow says. “Infrastructure debt, real estate debt, and corporate lending are favoured sectors.”
Despite signs of receding inflation and central bank cuts on the horizon, the survey found almost three-quarters of SWFs expect rates to remain relatively high compared to the recent past.
“A substantial majority (71 per cent) of respondents anticipate interest rates and bond yields to remain in the mid-single digits, while only 14 per cent believe that we will witness a return to the exceptionally low interest rate environment of the previous decade,” the paper says. “This is supported by the inflation data.”
However, while the negative impact of inflation/rates concern almost 75 per cent for the year ahead, geopolitical tensions top the worry charts at 83 per cent: geopolitics also ranks as the biggest risk to the global economy over the next decade (86 per cent) followed by climate change (70 per cent) with inflationary fears disappearing from the list.
Among other results, the Invesco survey uncovered a stunning U-turn on AI in the SWF community with sceptics reduced to a nine per cent minority (or three per cent in the case of central banks).
“Nearly all sovereign investors now believe that AI will eventually become an essential tool in their own investment process,” the study says. “This marks a change from 2019, when 37 per cent of central banks and 32 per cent of SWFs thought AI had no role to play in their organisations.”
The survey also reveals a surprising 10 per cent fall in the proportion of SWFs sporting environmental, social and governance (ESG) policies from 79 per cent last year to 69 per cent in the 2024 numbers – a slide Invesco attributes to qualitative factors.
“This apparent step back in ESG adoption is not a sign of waning interest or commitment, but rather a reflection of the rising maturity and higher standards in the ESG investing landscape,” the report says.
“As investors become more sophisticated in their understanding and application of ESG principles, they are reassessing their policies and practices, leading to a rationalisation of what truly constitutes an ESG driven approach. This means that sovereign investors are now applying stricter definitions, recognising that their previous approaches may not have met the higher standards that have emerged in recent years.”
More than 80 per cent of respondents include ESG attributes in manager selection while almost half “incorporate robust ESG due diligence and ongoing engagement”.
“The high percentage of sovereign investors incorporating ESG into manager selection and oversight demonstrates the ripple effect of ESG maturity,” the study says. “As investors become more sophisticated in their ESG approach, they expect the same from their asset managers who are incentivised to improve their ESG practices to win and retain mandates.”
