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Sovereign Wealth Funds Increase Alternative Assets Allocations

Sovereign wealth funds globally have increased their allocations to private equity, real estate, infrastructure and emerging markets, while reducing their exposure to listed and developed market investments, according to white papers issued today by State Street Corporation and the International Forum of Sovereign Wealth Funds (IFSWF).

“Much like all investors in today’s economic climate, sovereign wealth funds are balancing traditional financial theory with the complexities presented by today’s real-world circumstances,” said Will Kinlaw, senior managing director and global head State Street Associates. “They recognize that, in many cases, their long investment horizons represent an advantage, and they are seeking investments that will provide attractive long-term return, risk, and diversification properties.”

Sovereign wealth funds have substantially expanded their alternative, unlisted, and private investment portfolios. At least 30% of the surveyed group had invested more, and none of the respondents had reduced their exposure in this category.

“One of the biggest findings from this research is the growing focus on private markets,” continued Kinlaw. “Despite the allure of these investments, sovereign wealth funds are aware of the potential risks, with illiquidity topping the list. However, many have invested considerable time and resource in assessing these markets and have clearly identified attractive opportunities here.”

One-fifth of the funds surveyed had increased their exposure to Asia in the past three to five years, with 70% expecting no change to their exposure to this region in the near future.

Sovereign wealth funds are allocating assets to Asia in three major asset classes, with 90% of surveyed having deployed capital in listed equities, 70% to government bonds, and 60% to corporate debt.

Japan, along with the United States and United Kingdom, represent the three leading countries for investments.

“Local knowledge and risk-management know-how are essential to investing in private markets,” said Daniel Gerard, vice president and head of advisory solutions, Asia Pacific, State Street Global Exchange. “Asian sovereign wealth funds looking to invest into overseas private markets will benefit from employing risk and analytics solutions that support flexible investment strategies tailored for each market.”

At the same time, half of the sovereign wealth funds surveyed increased their exposure to emerging markets in the past three to five years, while no one had increased their allocation to foreign government bonds. Half of those surveyed had reduced their exposure to foreign government bonds.