Sovereign investors reaping the rewards of the equity bull market, but shift to alternatives set to intensify – Invesco study

Jul 9, 2018

• Sovereign investors see returns of 9.4% in 2017 thanks to equity bull markets, up from 4.1% in 2016
• Broader adoption sees equities overtake fixed income to become the biggest asset class in the sovereign segment
• Active management remains dominant in Asia Pacific as Western markets rotate to passive strategies
• Asian sovereigns expected to decrease equity exposure to fund investments into private markets
• Infrastructure in APAC seen as an attractive opportunity due to large government-backed initiatives

Hong Kong, 9 July 2018: Invesco today released its sixth Invesco Global Sovereign Asset Management Study*, an annual in-depth report on the complex investment behaviour of sovereign wealth funds and central banks, which this year shows that equities have now overtaken bonds to become the lead asset class for sovereigns across active, passive and factor strategies.

This year’s study was conducted face-to-face amongst 126 individual sovereign investors and central bank reserve managers across the globe representing $17 trillion** of assets, of which 62 are central banks (35 in 2017), reflecting their growing status as sovereign investors.

According to the study, average allocation to equities have increased to 33% from 29% in 2017 (Figure 1). The increase in equity allocations has been driven by a number of factors, including the equity bull market. On average, equity returns were 8.7% amongst respondents, which supported strong outcomes at portfolio level (with total portfolio returns of 9.4% in 2017, up from 4.1% in 2016).

“Global sovereign investors have made clear their interest in equity exposure, although Asian sovereigns have less exposure than global peers,” said Terry Pan, Chief Executive Officer for Greater China, Southeast Asia and Korea at Invesco.  “The return of market volatility this year has been anticipated by sovereign investors, and as such we expect them to continue diversifying into new asset classes including alternatives.  This year’s study also revealed an increasing sophistication in the asset allocation of central banks, which are expanding beyond traditional fixed income assets and adopting some similar investing trends as their sovereign peers.” 

Active management holds firm

Active management remains the dominant equity portfolio strategy for Asia investors, with 58% of equity portfolios actively managed in Asia. Nonetheless, a majority of Asia Pacific investors have been increasing allocations to factor strategies (54%) and intend to continue (58%).  Such factor strategies continue to remain a smaller portion of portfolios than Western peers (6% in APAC versus 14% among Western sovereigns) (Figure 2).   

From a global perspective, passive management, and to an extent factor investing, have made significant inroads into portfolios. Over the last three years, just under half (45%) of sovereign investors undertook some degree of rotation out of active strategies into passive and factor investing (Figure 3), to the point where less than half of equity portfolios are now actively managed (Figure 2). Over the previous three years, over half (53%) of sovereign investors have increased allocations to factor strategies, with 56% planning to continue increasing over the next three years.

Future equity allocations

With allocations to equities increasing over the past five years, as a result, nearly half of global sovereign investors are now incrementally or materially overweight in equities. While many sovereign investors are content to remain overweight, some are not comfortable with the status quo. More than a third (35%) plan to reduce equity weightings over the medium term (Figure 4), with the intent overall to make small reductions rather than cut significantly.

Of those looking to reduce weightings, many are driven by views that equity valuations are high on both absolute and relative bases, and that markets are at risk of correction, either due to geo-political or economic cycles. Specific issues acting as headwinds to equity markets include macro concerns such as the possibility of a trade war, China, valuations, and inflation.  Notably, on an absolute basis, APAC investors see equity valuations slightly cheaper (at 7.4x earnings) than Western investors (at 7.7x earnings). 

Asia Pacific sovereigns look to alternatives

Half of Asia sovereign investors indicated a changing role for equities in their asset allocation, with 47% of APAC investors expected to decrease equity holdings over the next few years (versus 37% among all respondents globally), and only 13% expect to increase exposure (versus 25% among global respondents). 

Instead of equities, APAC sovereigns show a keen interest in private markets, specifically illiquid alternatives, despite regional investors maintaining a lower exposure to private markets than Western peers (19% versus 26% in the West).  An increase in allocation to alternative credit is expected by one third of Asia Pacific respondents, while 42% plan to increase exposure to real estate and private equity.  All APAC respondents suggested that they were looking to fund investments into such alternatives through equity reductions.  

Globally, most sovereigns will continue to allocate to private markets, focusing on opportunities in new regions instead of the traditional home bias. Large initiatives, such as the Belt and Road initiative in China, have made APAC the most attractive region for infrastructure, with 64% of sovereigns seeing this region as an opportunity, closely followed by infrastructure in emerging markets for 56% of investors.

Terry Pan added: “By expanding their universe of investment opportunities, global investors are realizing the vast potential of the Asia Pacific region, which is undergoing a transformation in infrastructure.  Sovereigns have a variety of vehicles to access this market, including direct investment in private markets as well as through debt and equity investment.”
Notes to Editors:

The full 2018 Invesco Global Sovereign Asset Management Study for Professional Clients can be found at:

*This is Invesco’s sixth sovereign asset management study. In 2018 we conducted interviews with 126 different sovereign investors compared to 97 in 2017. The findings have been validated using ‘common cohort’ analysis of the 48 interviews conducted with the same firms in the past four years. In this study Invesco defines sovereign investors as state-owned investors, which includes: standalone Sovereign Wealth Funds (SWFs), state pension funds, Central Banks and government ministries.

**Sourced by NMG Consulting: total assets of those sampled stands at $17 trillion as at year end 2017.

*** Economic challenges affect sovereigns differently, according to their liabilities, risk appetite, funding dynamics and other factors. The Invesco Global Sovereign Investor Model categorises sovereign investors by basing its segmentation on investment objectives.

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