The most important sovereign wealth fund managers look at the broad lines, not the details, in the portfolios.
(Photo: Imago/Westend61)
Frankfurt The sovereign wealth funds of this world are adjusting their investment policy to the time after the inflation and interest rate peaks in the USA and Europe. They continue to see relatively stubborn inflation rates at an elevated level and a possible recession or low growth rates in the global economy as serious risks, as well as possible misjudgments of monetary policy by the central banks.
This is shown by an exclusive analysis by the financial group State Street, which, together with the International Forum of Sovereign Wealth Funds (IFSWF), examined assets worth $36.7 trillion. The IFSWF – a network of sovereign wealth funds – includes sovereign wealth funds from Abu Dhabi, Kuwait, China and Qatar.
Institutional investors with a long-term focus and members of the IFSWF only realign their asset distribution if the underlying conditions change fundamentally. That was the case last year and will be happening again in 2023, State Street reports.
The most important sovereign wealth fund managers look at the broad lines, not the details, in the portfolios. For example, some of them expect that countries in Asia will get inflation under control faster than, for example, Europe, where high energy prices and a possibly less decisive European Central Bank would be felt.
According to State Street, investment professionals’ appetite for risk increased last year through year-end, peaking in late November. Since then, the willingness to take more risk in investments has waned again, and some sovereign wealth funds are using more hedging strategies against possible falls in exchange rates and prices.
More paper from emerging markets
Sovereign wealth funds are keeping their cash holdings constant because interest rates are good again for short-term deposits. At the same time, they gave up fixed-income paper and stocked shares over the past few years to an average rate of around 52 percent today. make pensions now about 19 percent, cash 18 percent off.
Within equities, sovereign wealth funds have bought more emerging market securities than developed market securities since June 2022. In terms of bonds, on the other hand, they prefer the USA and some countries in the euro zone such as Spain, while they consider federal bonds and British and Japanese government bonds to be less attractive. On the currency side, they prefer the US and Canadian dollars.
In the so-called private markets – which include private equity and private debt – fundraising has slowed, according to State Street. Sovereign wealth funds have become more cautious and are primarily considering whether to entrust their capital to new funds in the market. A sovereign wealth fund manager said that after years of increasing capital commitments, lenders were expecting more returns from earlier investments.
A survey by Coller Capital had forecast for 2023 that the expansion of private equity commitments among many institutional investors would be slowed down by the so-called denominator effect. If the value of a portfolio falls due to sharp losses in individual asset classes such as stocks or bonds, the relative proportion of private equity investments in the securities portfolio increases. If upper limits are then reached, investments in private equity must be scaled back.
However, wealth manager Schroders also believes that recessions can offer attractive investment opportunities for private assets. For the next few quarters, it is expected that small and medium-sized buyouts – that is, takeovers by private equity funds – will deliver better results than large buyouts.
This is partly due to a more favorable environment in terms of available capital for smaller transactions. Overall, State Street and IFSWF concluded that managers of sovereign wealth funds and long-term institutional investors would act more cautiously.
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