Emerging markets and alternative assets are choice bets for world’s largest sovereign wealth funds

Emerging markets and alternative assets are expected to benefit from billions of dollars of investment, according to a report that reveals the investment stance of the world’s largest sovereign wealth funds.

Emerging markets and alternative assets are expected to benefit from billions of dollars of investment, says a report that reveals for the first time the investment stance of the world’s largest sovereign wealth funds (SWFs).

On Monday, the asset management firm Invesco released a study that analyses SWFs’ investments in the Middle East, Scandinavia, China, Latin America and the United States. Collectively, they amount to assets of about US$4.7 trillion, or 80 per cent of the overall sector, which is believed to be about $6tn globally.

Sovereign portfolios are currently focused on North America and Asia Pacific, but the 37 global sovereign investors surveyed suggested that emerging markets would gain significant investment funds flow from SWFs.

While 56 per cent of SWFs’ investments are in developed markets, there is a growing focus on the developing markets of Africa and Latin America.

Middle East SWFs’ investments show a 69 per cent shift towards alternative assets from traditional asset classes in the past 12 months, including domestic and international properties, private equity, hedge funds and infrastructure.

The survey respondents said they expected average annual returns of 8 per cent from alternative assets, compared with 7 per cent from equities, 4 per cent from bonds and 2 per cent from cash.

The trend in allocating investment funds between domestic and world markets was evenly split, the report said.

“Many SWFs have signed up to the Santiago Principles which guarantee transparency, and more and more [SWFs] are publishing annual reports. But this report shows the drivers of investment, which is important,” said Nick Tolchard,the head of Invesco Middle East.

According to Mr Tolchard, Middle East SWFs including the Abu Dhabi Investment Authority and the Kuwait Investment Authority have collective assets of about $2tn.

On the issue of accepting lower investment returns against set targets, Asian SWFs were far more demanding. whereas Middle East and western SWFs were willing to accept socio-economic advantages at the expense of investment returns.

“There is also an increasing trend of direct investment in private equity rather than through third-party funds,” Mr Tolchard said.

By nature, SWFs differ from one another, as each plays a role pertinent to its region, size or investment objective.

The report finds that there are four criteria for SWFs: investment sovereigns that are based on international equities and control 43 per cent of sovereign assets; liability sovereigns, which are funds with an income requirement and state pension entitlements that control 12 per cent of sovereign assets; and liquidity sovereigns, which are government schemes that focus on fixed-income investments, such as SWFs in Africa and Latin America.

Thirty-three per cent of sovereign assets and development sovereigns support domestic investments through public and private partnerships, and the building infrastructure.

For private investors, there are lessons to be learnt from the investment strategies of SWFs.

“There are some common themes that are important to private individuals. One is the idea of diversification, another is to have some component that is biased towards your home market but not to have complete exposure to your home market,” said Mr Tolchard.

“The other is to take into account risk factors when you are putting a portfolio together. It’s the themes rather than the details where private investors can gain, as individuals usually have particular objectives. With a particular risk profile, a government investor will have different circumstances.”

* With Bloomberg News