Sovereign wealth funds, state pension plans and central banks have doubled their exposure to alternative assets such as real estate and private equity over the past six years, a survey has revealed.
According to the latest annual Invesco Global Sovereign Asset Management survey, some of the world’s largest investors have moved to bolster their alternatives holdings to diversify their portfolios away from mainstream assets.
Alternatives now form 20% of the average portfolio of sovereign investors – up from 10% just six years ago.
“Clearly equities had a very good year in 2017 – but perhaps less positive in the previous few years,” said Alex Millar, head of EMEA sovereigns at Invesco. “Now they’re looking for other sources of returns other than equities.”
Over the course of 2017, on average sovereign investors posted returns of 9% – with development funds achieving 12% due to “their exposure to private markets assets”, the report said.
Invesco canvassed 126 organisations around the world that held a total of $17trn (€14.6trn).
Across the board, Invesco reported that allocations to equities had also risen, to the extent that they now form a larger part than fixed income holdings in the average portfolio.
Despite this overall rise, the funds remained concerned about whether equities were becoming overvalued, combined with a further concern about whether there might be a “significant equity market correction” in 2018.
Millar said sovereign investors had displayed a certain amount of prescience, raising concerns about a possible trade war when the survey was conducted in January and February.
“They are very clear sighted about some of these factors,” Millar added.
He also noted that the lack of correlation between alternatives and the mainstream asset classes meant that the move into assets such as property could also be seen as a form of inflation protection.
“The sovereigns are not only going to get a good return stream from alternatives over the long term, but they realise that [these assets] bring other attributes to the table as well,” Millar said.
Liquidity for sovereign investors was one of the main issues, he added, with investing in alternatives on any meaningful scale often seen as problematic. However, many were keeping a “watching brief” on developments in the cryptocurrency markets.
“Crypto-currencies were not dismissed out of hand as we might have thought they could have been,” he said. “Clearly sovereigns aren’t investing in Bitcoin, but they are looking at [the market] more broadly, largely through venture capital exposure.”