Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Future Fund gets top marks as sovereign investors rebound
Singapore’s Temasek is the largest investor in the gang of four with 100 per cent governance, sustainability and resilience (GSR) scores in Global SWF’s 2023 GSR scoreboard, a group that also includes sovereign investors like Canada’s CDPQ, New Zealand Super, and Nigeria Sovereign Investment Authority.
“Sovereign wealth funds continue to improve their best practices: when we first completed this exercise in 2020, the average score of SWFs globally was 46 per cent – today it is 55 per cent, even with the entry of new funds that usually present worse results at inception,” the Global SWF report says.
“Sovereigns are improving their disclosure and their “G” element has risen dramatically. Despite the improvement, they are still failing the “S” and “R” elements with 4.9/10 and 2.1/5 respectively, but we are sure this will change in the next few years as funds keep maturing.”
Meanwhile, both the Future Fund and Aware Super were in the eight institutions that scored 96 per cent. Global SWF’s GSR scoring is based on 25 different elements: 10 related to governance, 10 to sustainability, and five to resilience, which are answered binarily (yes/no) with equal weight and then converted into percentage points.
GSR scores overall have increased from 59 per cent in 2022 to 63 per cent this year, a shift that Global SWF describes as “remarkable”, with sovereign funds “catching up quickly with pension funds”.
“Public pension funds continue to display better marks than sovereigns across the board,” the report says. “This year we have witnessed an amazing push for sustainability, with many pension funds issuing their first responsible investing reports and providing more information around ESG key metrics.
“The improvement in resilience was much more modest, given the performance of the 2022 financial markets that affected funding ratios greatly. We would expect their “R” element to keep improving as they bear the results of stronger policies.”
The change in market conditions is also having a follow-on effect on investments, with institutions in the Global SWF database deploying US$101.6 billion in 256 deals, 24 per cent less than in the second half of 2022 – though while investments are fewer, they’re larger on average.
“As sovereign investors shy away from venture capital and smaller commitments, some of the key trends we have observed for the past year or so are the renewed interest in hedge funds as an uncorrelated strategy, and a peak in the commitments and direct investments in private markets, especially in private credit,” the report says.
“The pressure on achieving sustainability goals at organization level is also having an impact in the investment preferences of sovereign investors. In 2021 and 2022, we saw for the first time investments in “green assets” (mostly renewable energy) beating investments in “black assets” (mostly, oil and gas and mining). This trend has remained during the first half of 2023, which saw significant activity.”
Oceania is once again the region with the highest average score – 78 per cent – with superannuation industry consolidation expected to create larger funds with better GSR scores. The Future Fund was also singled out as a leader in governance, with its “robust” governance framework of the Board of Guardians and the overarching management agency which provides advice and recommendations to them “rare among SWFs”.
“Our strong statutory governance framework gives us investment independence from government, while the clarity of our risk and return objectives drives a sharp focus on what we need to achieve,” Future Fund head of corporate affairs Will Hetherton told Global SWF. “Together these elements have been – and remain – really important to the Future Fund’s investment and organizational success.”
“Over the last few years though, we have also recognized that the world is changing and that the processes and thinking that have served us well in the past need to evolve. We’ve retested our assumptions, refreshed our investment thinking, used new data and insights to contribute to decision-making and created new levers to help us manage risk and access alpha.”
