- Western sovereign investor confidence stable despite challenging external environment
- New sovereign capital flowing into US and Frontier Markets – and away from Brazil, Russia, and China
- Real Estate becomes primary target for increasing US sovereign allocations to alternatives – growing faster than private equity and infrastructure
ATLANTA, June 21, 2016 /PRNewswire/ — Invesco released its fourth annual Invesco Global Sovereign Asset Management Study,* an in-depth report on the complex investment behavior of sovereign wealth funds and central banks, conducted face-to-face amongst 77 individual sovereign investors and reserve managers across the globe and representing 66% of sovereign assets and 25% of foreign reserves – totalling $8.96 trillion** of assets.
This year’s study reveals that despite continued market volatility and the sustained low oil price, U.S. sovereign investor confidence is stable and they continue to pursue long-term investment goals through strategic asset allocation. This year there is a strong preference for the Unites States above other geographical regions and an increased appetite for real estate investment to drive allocations towards alternatives.
Sovereign investor confidence stable despite challenging external environment
While the challenging macro-economic environment, driven by the sustained low oil price, has impacted global sovereign investment performance, with average annual portfolio returns having fallen, U.S. sovereign investors remain better prepared in terms of investment capability and governance. On average, new funding accounted for 6% of assets, while the average sovereign investor withdrew or cancelled only 4% of assets, as sovereigns cope with funding challenges.
Time horizons for investing are also lengthening as U.S. sovereign investors manage these challenges, rising from 6.4 to 10.0 years over the past four years amid continued interest in the diversification benefits and illiquidity premiums offered via alternatives.
The study indicates that overall U.S. sovereign investor confidence has been stable since 2013 – with Invesco’s Sovereign Confidence Index highlighting that overall confidence has increased from 7.2 in 2014, to 7.8 in 2016. Tracking confidence based on returns and aggregate capabilities (looking at investment expertise, people and talent, governance and third parties), the index shows that global liability & development sovereigns report increased confidence consistently across both categories. While lower returns have impacted global investment & liquidity sovereigns, who have seen confidence based on performance drop from 8.4 in 2014 to 7.7 this year, confidence in aggregate capability has gone up from 7.4 to 7.8 over the same period.
Alex Millar, Head of EMEA sovereigns and Middle East and Africa institutional sales at Invesco, commented: “Many sovereign investors are now comfortable operating in an environment with limited new funding. Some have ceded assets to governments without cancelling long-term investments, while others have not been called upon at all for withdrawals over the last 12 months. Many of these institutions appear confident in their funding outlook and are increasing the importance of their investment objectives relative to their short-term liquidity needs.”
The United States becomes the most attractive market for sovereign investment
While the United Kingdom had previously emerged as the preferred developed market for western sovereign investment, the United States has taken the lead in 2016. Scoring a rating of 8.3 (out of ten) in attractiveness to sovereign investors in 2014, this has risen to 8.7 in 2016 – compared to a slightly lower 7.7 rating in 2016 for the U.K. Western sovereign investors also remain bullish on future opportunities in the United States, and in U.S. infrastructure in particular.
Sovereign investors globally expressed the view that the United States appears increasingly open to their investments following positive perceptions of sovereign investments into the U.S. financial sector during the global financial crisis. Many also feel it is now easier and more attractive to invest in the United States, in large part-linked to more investment friendly policies such as the introduced exemption in 2016 for ‘qualified foreign pension funds’ from the Foreign Investment in Real Property Tax Act on real estate purchases.
New allocations to frontier markets – shifting away from BRIC countries
New allocations to frontier markets are also on the rise, with western allocations to Africa increasing from 0.5% in 2014 to 1.1% in 2015. Manufacturing capability, political stability, and the quality of infrastructure are cited as key factors for this change, and via a range of products including conventional equity and fixed income products, and direct investments into alternatives such as real estate.
Conversely, the BRIC markets – Brazil, Russia, and China – have all lost their attractiveness to U.S. sovereign investors amid weaker performance, with only India becoming increasingly attractive over the last two years. In comparison to the last few years, sovereign investors globally are now less willing to overlook political and regulatory concerns in these regions in order to hit target allocations. Sovereign investors note a struggle with commodity prices and falling stock markets for large export markets like Brazil and Russia, while the shrinking labour force in China is driving up manufacturing costs and squeezing private sector margins.
Alex Millar explained: “Despite being long-term strategic investors, sovereign investors are quick to adjust to perceptions of market attractiveness, responding to latest market data or regulatory change. Market performance and public policy also factor into their longer term strategic asset allocation choices – especially geographically. The ability for governments to attract sovereign investment via policy decisions is a key finding and presents an opportunity for governments globally to attract significant long term capital to support economic growth.”
Real Estate emerges as the preferred asset class
U.S. sovereign investors have focused on increasing allocations to infrastructure and private equity over the last two years; however attitudes have changed in 2016, and for the first time fewer sovereign investors expect to increase allocations to these asset classes. While allocations to infrastructure and private equity have remained steady over the last three years, total allocations remain low. From 2013 to 2015, western sovereign investors’ average total portfolio assets to infrastructure increased from 3.5% to 4.2%, while private equity fell slightly from 5.8% to 5.7% of the average sovereign portfolio, as U.S. sovereigns focused on internalising private equity management.
Conversely, their allocations to real estate have risen from 7.1% in 2013 to 8.2% in 2015. Global sovereign investors expect to increase global and local allocations into real estate more than any other asset class in order to meet diversification and absolute return objectives.
Sovereign investors globally attribute this largely to real estate investments carrying fewer execution challenges than private equity and infrastructure, where sovereigns have encountered difficulties in deploying their assets. Investors also cite a greater number of credible global asset managers, and a long list of developers and operators, to partner with in real estate investments. As a result, more than 75% of U.S. sovereign investors are underweight infrastructure and 75% underweight private equity, relative to their target allocations7.
Alex Millar concluded: “While the challenges facing sovereign investors since the start of this period of oil price volatility have clearly not gone unnoticed, and returns have been affected, confidence among global sovereign investors is relatively high. Within Invesco’s sovereign investor profiles*** this confidence is most noticeable amongst Liability and Development sovereigns, while Investment and Liquidity sovereigns have faced greater challenges due to the importance of commodities to their new funding. This year’s study reinforces the view that sovereign investors are better prepared to cope with volatility and funding challenges, and continue seeking strategic asset allocation opportunities, building in-house capabilities, and exploring expert investment partners in order to structure their portfolios towards securing diversified returns for the long-term.”
About Invesco Ltd.
Invesco Ltd. is a leading independent global investment management firm, dedicated to helping investors worldwide achieve their financial objectives. By delivering the combined power of our distinctive investment management capabilities, Invesco provides a wide range of investment strategies and vehicles to our clients around the world. Operating in more than 20 countries, the firm is listed on the New York Stock Exchange under the symbol IVZ. Additional information is available at www.invesco.com .
The Invesco Global Sovereign Asset Management Study is intended only for Institutional Investors in the United States. This document is for information purposes only and is not an offering. It is not intended for and should not be distributed to, or relied upon by, members of the public. Circulation, disclosure, or dissemination of all or any part of this material to any unauthorized persons is prohibited.
This document is issued in the US by Invesco Advisers, Inc., Two Peachtree Pointe, 1555 Peachtree Street, NE, Atlanta, GA 30309
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