The world’s largest investors are torn between flying to safety and fighting for growth as the COVID-19 crisis rolls on, a new analysis has found.
According to an Official Monetary and Financial Institutions Forum (OMFIF) report, for the first time since inception of its Global Public Investor (GPI) study, results show more investors are looking to buy sovereign bonds than offload them.
About a quarter of the almost 80 government-owned institutional investors caught by the OMFIF survey planned to up their exposure to sovereign bonds compared to 13 per cent targeting a lower allocation to the asset class in the next one to two years.
“Following several years of shifting allocations away from low-yielding government bonds, the trend is seemingly reversing,” the report says.
While the bond bulls outnumber the bears for first time in the survey, the OMFIF says for some institutions “the cautious embrace of risk continues”.
“Despite concerns about pandemic-related price corrections, 30% of GPIs plan to increase their allocation to equities, many of them significantly so, while only 5% plan to reduce,” the paper says.
Pension funds are the most upbeat about shares with 80 per cent looking to increase allocations in the near-term followed by sovereign wealth funds (44 per cent) and central banks (15 per cent).
Close to 25 per cent of all GPIs said they would reduce cash holdings over the next 12-24 months while 10 per cent planned to increase allocations to gold.
“Overall, the majority of respondents plan to keep allocations to all asset classes steady,” the report says.
Among other findings, the survey revealed GPIs are considering investing more in alternative assets, real estate and infrastructure.
GPIs are also taking sustainable investment more seriously, a trend accelerated by COVID-19, the OMFIF study says.
The survey found so-called ‘do no harm’ environmental, social and governance (ESG) strategies “are followed by 26% of central banks, 58% of sovereign funds and 81% of pension funds”.
“Sweden’s Riksbank divested of regional debt from Australia and Canada in November 2019, citing concerns over high carbon emission,” the report says.
The wider annual OMFIF study of 750 GPIs – covering government-owned pension and wealth funds as well as central banks – found assets under management (AUM) across the sector increased almost US$2 trillion last year to reach a total US$39.5 trillion, representing over 43 per cent of global GDP.
Growth in GPI AUM in 2019 of 5 per cent bettered the global GDP expansion of 2.9 per cent last year.
“[The 2019 result] marks an acceleration from the previous year, when total AUM growth stood at 3.7%, reflecting public investors’ gains from strong equity markets and the rising gold price,” the study says.
Much of the increase centres on GPI pension funds where those in the Asia-Pacific region reported the highest annual growth-rate of 9 per cent, the OMFIF paper says, with AUM up US$365.7 billion for the year.
In total, Asia-Pacific (including Japan, China, India etc, as well as Australasia) GPIs hold the largest AUM by region at US$15.1 trillion followed by North America (US$9.8 trillion) and Europe (US$8.2 trillion).
The NZ Superannuation Fund ranks at 192 among the top 750 GPIs by AUM with the Reserve Bank of NZ sitting at 258 on the list.
But the accompanying 188-page OMFIF report covers the gamut of GPI issues ranging from economics to digital currencies to central bank art collections.
David Marsh, OMFIF founder and chair, says the latest study shows that in the wake of the latest crisis “GPIs are no longer mere instruments”.
“In many cases – in the absence of broader international strategies, occasioned by the US retreat from global leadership – [GPIs] have become source and bedrock of policy,” Marsh says in the report. “… For all these institutions and the people and businesses they support, the threshold to fresh travail is low – and the line between success and failure is agonisingly thin.”