Sovereign Wealth Funds Cut Risk Exposures Before Pandemic Hit

Tom Burroughes

21 July 2020

The world’s sovereign wealth funds’ exposure to equities fell to the lowest level in six years at the end of last year, as these government-run entities took risk off the table because of worries that markets might come under pressure. They had already hunkered down before COVID-19 struck.

has issued its eighth annual Global Sovereign Asset Management Study, detailing views of 139 chief investment officers, heads of asset classes and senior portfolio strategists at 83 sovereign funds and 56 central banks, who together manage $19 trillion in assets. Such a collective sum gives SWFs huge financial firepower.

Before the pandemic hit markets, sovereigns’ average equity allocation at the end of 2019 was 26 per cent, their lowest level since 2013, both relative to fixed income (34 per cent) and as an overall proportion of asset allocation. The movement away from equities was motivated, in part, by end of cycle concerns that led to decreasing strategic allocations, Invesco said.

Data from SWFs is instructive for wealth managers. SWFs, such as and that of Norway control trillions of dollars in assets. These are backed by oil and other assets that policymakers predict will eventually run out. In some parts of the world, where ruling families often wield power, such as the Gulf and parts of Asia, the dividing line between SWFs and family offices is blurred. Like family offices, sovereign wealth funds are designed to invest over multiple generations.

Among other findings, the Invesco study said that over the next 12 months, 37 per cent of sovereigns aim to decrease equity allocations, with half of these doing so by more than 5 per cent. Just 22 per cent of sovereign investors aim to increase their equity allocations over the next 12 months. Some 43 per cent of sovereigns plan to continue allocating to fixed income, 43 per cent to private equity and infrastructure and 38 per cent to real estate.

Meanwhile, sovereigns based in Asia had lower exposure to equities than their global counterparts (19 per cent vs 26 per cent) and greater exposure to fixed income (38 per cent vs 34 per cent). There are, however, signs that sovereigns are rebalancing towards equities, with 33 per cent planning an increase in allocations. Asia-based sovereigns are also increasing allocations to private markets, including infrastructure (47 per cent) and real estate (46 per cent).

“The first quarter of 2020 presented sovereigns with a rare but classic exogenous shock that spared few assets,” Terry Pan, chief executive, Greater China, Southeast Asia and Korea at Invesco, said.

“Given that Asian investors were already under-allocated to equities at the beginning of the crisis, and as we’ve observed a very strong recovery, particularly in Chinese equities, I’m not surprised to see sovereigns more confident to invest in this asset class in the near term.”

Climate change
The study found that 83 per cent of central banks and sovereigns believe that immediate action is required to combat climate change, and this is increasingly being translated into investment strategies with an understanding that climate-related risk should be embedded into the wider investment process.

Among Asia-based sovereigns, 88 per cent believe that institutional investors have an obligation to consider climate change in their portfolio, while 41 per cent of sovereigns based in the region incorporate climate change in their portfolio (compared with 49 per cent globally) and 13 per cent attempt to capture their portfolio’s carbon footprint (versus 24 per cent globally).