The long-running Invesco global sovereign investor report has recorded the first-ever aggregate loss for the sector since inception of the survey in 2013.
According to the Invesco ‘Global sovereign asset management study’, the 85 sovereign wealth fund (SWF) respondents suffered an overall loss of -3.5 per cent over 2022 as most asset classes took a bath.
“With the rapid rise of interest rates impacting fixed income returns and the listed asset price correction impacting equity returns sovereign investors were faced with a challenging year,” the report says.
SWFs tilted to shorter-term goals (classified as ‘liquidity’ funds by Invesco) saw the worst results last year, falling 6.7 per cent as higher bond allocation weighed down on returns.
Regardless of the bond rout in 2022, the study notes that fixed income “allocations have slightly rebounded after two years of decline, now sitting at 28% on average (up from 27%)”.
“Equity allocations have retreated slightly, down from 32% last year to 30% in 2023,” the Invesco report says.
In fact, SWF fixed income, shares, cash and ‘liquid alternatives’ allocations have all moved within fairly narrow ranges in each survey from 2016 onwards: only ‘direct strategic investments’ and ‘illiquid alternatives’ show any clear trend, moving in inverse directions over the eight-year period.
The proportion of fund assets held in direct strategic investments fell from 17 per cent in the 2016 study to just 10 per cent in the latest report while illiquid alternatives rose from 13 per cent to 23 per cent over the same period.
“Higher allocations to infrastructure were a notable feature of the past 12 months, with this asset class now accounting for 7.1% of portfolios, offsetting a decline in real estate and flat allocations to private equity,” the study says.
Meanwhile, the average SWF investment time-frame pushed out further last year.
“Over the course of 2022, investors continued to extend their investment time horizons resulting in the sixth consecutive annual increase reported through this study. Sovereign wealth funds reported an average investment horizon of 11.3 years, versus the 10.7 years reported in 2022.”
Rod Ringrow, Invesco official institutions head, says in the report that the survey highlights five main themes in the sovereign asset management sector:
- a growing preference for fixed income (including private debt) and emerging markets assets;
- consistent interest in private assets – such as real estate, private equity and infrastructure;
- an ongoing shift to sustainable energy investments – infrastructure in the case of SWFs and ‘green bonds’ for central banks;
- more partnerships with specialist external managers to meet targets for sustainable development goal investments; and,
- an increasing central bank appetite for gold as a safe-haven asset with record purchases of the precious metal by these monetary institutions last year and through the first quarter of 2023.
The survey, conducted by third-party firm NMG between January and March this year, took in 85 SWFs and 57 central banks with a focus on “key decision makers” in each institution.