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Sovereign investors favour fixed income and illiquid alts

But overlook equities as they try to capitalise on ‘unprecedented buying opportunity’


Kirsten Hastings

Invesco’s eighth annual global sovereign asset management study has found that many were well-prepared for the emergence of coronavirus at the start of the year.

With a drop in valuations and plenty of dry powder, it created what the report describes as an “unprecedented buying opportunity”.

The sector doubly benefitted, as custodians of long-term capital, there was no imperative to sell to meet withdrawals.

With the lessons of the global financial crisis still ringing in everyone’s ears, many sovereigns had also built large cash reserves – giving them the means to take advantage of the growing opportunity.

In its report, Invesco collated the views of 139 chief investment officers, heads of asset classes and senior portfolio strategists at 83 sovereign funds and 56 central banks.

The institutions collectively manage $19trn (€16.4trn) in assets.

Allure of infrastructure

Over the next 12 months, sovereigns plan to continue allocating to fixed income.

Rod Ringrow, head of official institutions at Invesco, commented: “Traditionally, fixed income is seen as a defensive anchor and this was tested by the crisis with even the US government caught up in a broad sell-off as investors rushed into cash.

“However; government interventions, including rate cuts and global quantitative easing, forced down yields and had a positive impact on many fixed income portfolios.”

Looking forward, 43% of respondents intend to increase their fixed income allocation over the next 12 months (see chart at bottom of page).

A similar proportion are looking to private equity and infrastructure, with 38% eyeing up real estate.

The report found that covid-19 accelerated the trend towards infrastructure by creating potential distressed opportunities.

While cost has been an issue, some are viewing the current situation as an opportunity to take advantage of selling in sub-sectors, such as airports.

“Infrastructure projects, particularly electricity generation and transmission that help countries transition away from fossil fuels, were seen as ways of fulfilling ESG objectives,” Ringrow said.

“However, many pension funds also have this theme, so it can be a challenge for some of the medium-sized sovereigns and those newer to the asset class to source the right investments.”

Thanks, but no thanks

While fixed income has risen in investors’ estimations, equities are being approached more cautiously.

Even before the pandemic took hold, the average equity allocation of sovereigns at the end of 2019 was at its lowest level since 2013 – relative to both fixed income and as an overall proportion of asset allocation.

According to Invesco; this was motivated, in part, by end-of-cycle concerns that led to decreasing strategic allocations.

Looking forward, 37% of sovereigns plan to decrease their equity allocations, with half of these doing so by more than 5%.

Just 22% plan to increase over the next 12 months, but will do so cautiously.

Source: Invesco