Wealth funds called on to support economies amid COVID-19 – study
More than a third of sovereign wealth funds have been called upon to support their local economies or close budget deficits in 2020 in light of the COVID-19 pandemic.
ninth edition of the Global Global Sovereign asset management One study found that 78% of liquidity sovereigns – with assets that are used in economic shocks – were tapped for assets last year, compared to 58% of investment sovereigns, defined as those that don’t. not invest with specific liabilities to finance.
The mandate of liquidity funds has also led these investors to keep their investment horizons short. Among sovereign liquidity funds, the average investment horizon was 2.9 years in 2021, compared to three years in the 2020 and 2019 surveys.
However, other types of sovereign investors have lengthened their investment time horizons, with investment funds dropping from 9.9 years in 2020 to 8.1 years in 2019.
“Overall I would say it’s a very positive story – sovereign wealth funds have responded to the need for what they were required to do in a year where there has been quite a bit of upheaval,” Rod Ringrow, head of official institutions at Invesco, said in a statement. interview. “I am not surprised, given the pandemic, that liquidity sovereigns” have focused more on the short term, he added.
The overall returns of the wealth funds were slightly lower, at 7.3% in 2020 against 7.6% the previous year. But “all things considered for the year, (it was) actually a pretty good result,” Ringrow said.
In terms of trends, one of the most notable has been a reversal in asset allocation preferences. Until last year, sovereign wealth funds increased their bond allocations at the expense of equities, but this year they are abandoning bonds. Fixed income securities fell to 30% of assets in 2021, down from 34% last year and 33% in the 2019 study. Average allocation to equities increased to 28% from 26% last year , although it remained below 30% in 2019; and illiquid alternatives also fell slightly, to 19% from 20% in 2020, but still above the 18% exposure of wealth funds in 2019. Exposure to cash increased to 9% in 2021, from 4% in 2020 and 5% in 2019.
Mr Ringrow said the move away from fixed income was driven by a continued search for yield and a need for liquidity – which was “driven by a pandemic”. The increased exposure to cash was also “not surprising” given the pandemic.
The remaining average allocations were 4% liquid alternatives – stable from 2020 and up from 3% in 2019; and direct strategic investments, which increased to 10%, compared to 12% in 2020 and 11% in 2019.
The study was divided into five themes: liquidity, ESG, China, real estate and central banks.
Invesco found that the pandemic had increased the already growing adoption of environmental, social and governance factors among sovereign wealth funds. The proportion of sovereign respondents adopting an ESG policy at the organizational level increased from 60% in 2019 to 64% and from 46% in 2017. Among sovereign respondents, 23% said the COVID-19 pandemic was a catalyst for prioritize ESG, while 45% of central banks included in the study agree.
Regarding China, sovereign wealth funds continue to view the market as attractive.
“When the pandemic broke we saw an initial flow to the dollar and the United States, but even this past March we saw customers seeing Asia as a potential bright spot in terms of where to invest.” said Mr. Ringrow. mentionned. “Sovereigns have returned to APAC and China (as) a source of alpha.”
Invesco asked sovereign wealth funds for their views on China’s attractiveness as an addition to portfolios over a three-year period. This year, China’s attractiveness was rated 6.6 out of 10 in 2021, compared to 6.1 in 2019 and 5.2 in 2017. The United States, by comparison, scored 7.8 out of 10 in 2021 and 2019, and 8 out of 10 in 2017.
Mr Ringrow noted that rulers are increasingly seeking opportunities in China’s private markets, such as those related to the digital economy and the emerging middle class.
Mr Ringrow also believes that China will be “forced to focus more on ESG as part of a larger global footprint to get things done”, especially given the path taken by the new US administration.
Real estate continued to be a popular allocation among sovereign wealth funds, although it fell in 2021, to 8.3% from 9% a year earlier. However, real estate remained the largest alternative asset class allocation for these funds, followed by private equity at 7.4%, hedge funds and absolute return funds at 3.9%, infrastructure at 3. , 7% and raw materials at 0.5%.
Invesco also polled central banks, finding that COVID-19 has caused these entities to focus on risk. A third of central bank respondents see a need for larger reserves, while allocations to liquidity tranches have also increased.
Invesco interviewed 141 CIOs, asset class heads and senior portfolio strategists at 82 sovereign wealth funds and 59 central banks. These investors held total assets of $ 19 trillion.