Sovereign wealth funds and government pension funds are seeking to become more nimble to adapt to a challenging investment environment, with increased allocations to alternatives among changes being pursued over the next few years, according to a survey of official institutions commissioned by State Street.
Conducted by the Oxford Economics Institute, the survey was of 102 official institutions from around the world – 52 were central banks, and 25 each were sovereign wealth funds (SWFs) and government pension funds.
Just over two-thirds (68%) of surveyed SWFs indicated they were looking to increase allocations to commodities, and 88% of government pension funds said they planned to up their allocations to real estate in the next three years, in the hope of achieving returns that beat equity markets.
With respect to other asset classes, the share of respondents planning to increase allocations was typically less than 65%.
The vast majority, 90%, of SWF and government pension fund respondents said an equity market correction would have a moderate or significant impact on their investment strategies over the three-year time frame.
State Street believes the survey shows how official institutions are adapting their investment and operational models to become more agile in the face of economic and financial uncertainty.
It identified 19 institutions it categorised as “the NIMBLE group”, matching or exceeding the top quartile of aggregate scores.
The institutions were not named.
Kevin Wong, senior managing director and head of sector solutions for State Street’s global services and global markets business in Asia Pacific, said official institutions were demanding “strong, flexible investment teams supported by a nimble operating model that help them identify opportunities, manage risk exposure and take corrective action”.
An uncertain outlook for interest rates, concerns about a generalised economic slowdown in China and the decline in the price of oil and other commodities are among the challenges calling on official institutions to change, according to the report.
“Above all,” it notes, “official institutions are pursuing a more dynamic approach to their investment strategies.
“Many official institutions are examining cost-effective ways to invest, such as building their own in-house resources or seeking different relationships with external fund managers.”
According to Victoria Barbary, director at the Investec Asset Management Investment Institute, the balance of power between official institutions and external advisers is becoming more equal.
“They’re moving from being just pure asset owners to being part asset managers,” she is cited as saying in the survey report. “[W]hen they do go external, they’re looking for very specific things.”
Institutions are developing more specialised strategies because it is becoming increasingly difficult to secure target returns through equities and brownfield investments, according to the report.
SWFs are more advanced in upgrading risk management than the other types of institutional investors, according to the survey – and also appear to be more satisfied with their approach.
Whereas 72% of SWFs surveyed described their risk-management strategies as “effective”, only 52% of government pension funds followed suit.
Over the next three years, pension funds are prioritising the use of derivatives and diversifying their portfolios, while SWFs are giving equal priority to a range of risk-management approaches, except for risk factor analysis, “which they appear to have already implemented”.
Like SWFs, government pension funds have a strong focus on building internal investment teams to provide improved returns and save operating expenses, according to the report.
“Pension funds are upgrading risk and compliance staff to a much greater extent than other institution types, with a 28-percentage-point gap over SWFs, reflecting the increased regulation facing the pensions sector,” it adds.
Cybersecurity is also high on the agenda of SWFs and government pension funds, with 84% of the latter revealing plans to strengthen in this area in the next year versus 72% for SWFs.
The survey also shows that Asia is the most attractive region for investment, with 89% of Asia-Pacific (APAC) institutions and 63% of institutions from other regions planning to increase their investments there.