Government-owned investment funds are on track to control more than US$50 trillion by the end of the decade after breaching the US$30 trillion mark for the first time in 2021, according to the new annual report of specialist publisher Global SWF.
Released late in December last year, the Global SWF report puts the latest “crystal ball” projection for state-owned investment funds at US$53.7 trillion by 2030, up from the current US$31.9 trillion.
Buoyed by upbeat stock markets and increasing contributions in 2021, both sovereign wealth funds (SWFs) and public pension funds (PPFs) saw significant growth last year.
“The size of the SWF industry increased a 6% year-on-year in 2021 and exceeded the US$ 10 trillion mark for the first time in history. This was not only helped by the price of equities, but also by the recovery of oil prices, and to a lesser extent by new funds established during the year,” the Global SWF report says. “Public pension funds also accomplished a historical milestone after growing past the US$ 20 trillion and experienced a higher y-o-y growth of 8.7% due to increased exposure to US stocks, and to rising contributions from pensioners around the world.”
In addition to organic growth in assets under management, the report says the number of state-owned investment funds is also tipped to rise from the current 436 to more than 500 by 2030 as more governments jump on the SWF bandwagon.
“The significant current account balances expected of Germany (US$ 2 trillion), Japan (US$ 1.1 trillion), Taiwan (US$ 0.7 trillion) and Switzerland (US$ 0.4 trillion) during the period 2021-2026, make us think that these territories could consider the establishment of their own future generations fund,” the report says.
But as well as experiencing super-charged growth, SWFs in particular are adopting more sophisticated investment strategies, Global SWF says, including a marked shift to alternative assets.
“[The] mix of asset classes has changed significantly in the past few years. Sovereign wealth funds have increased the part of the pie invested outside of stocks and bonds from 15% in 2008, to 23% in 2016 and 25% in 2021,” the report says. “Similarly, public pension funds have increased the allocation to alternatives from 11% in 2008, to 15% in 2016 and 19% in 2021. Considering the growth in assets these vehicles have experienced in the past few years, we are talking about a tremendous amount of new capital in real assets, private equity, and hedge funds.”
Furthermore, a number of trend-setting SWFs – including the NZ Superannuation Fund (NZS) – have shifted to a ‘total portfolio management’ (TPM) investment style that features a “more streamlined and dynamic approach to portfolio construction”.
“We have run an analysis with these ten funds and looked at their average annual return over 2016-2021, revealing a superior return (9.6%) to those SWFs not following TPM (6.9%) and to those PPFs not following TPM (7.5%),” the report says. “Even if we remove the outlier, Denmark’s ATP, the TPM-driven funds still perform better (8.5%).”
Last year also saw state-owned investment funds allocate more to renewable energy than fossil fuel assets for the first time.
“This milestone was a few years in the making and has concluded a trend that has been driven by social pressure and financial returns and accelerated by the Covid-19 pandemic,” the study says. “State-owned investors spent US$ 22.7 billion in 37 ‘green investments’, including stakes in brownfield assets, investments in greenfield assets, shares in listed companies, and commitments to new climate-focused funds.”
During the year three SWF chiefs were sacked including Angela Roddell, head of the US$81 billion Alaskan pension fund since 2015. Roddell, the only female SWF chief, was booted out in December 2021 following her public critique of some board decisions.
“This is not something you would expect from a country like the United States, but we must remember that all State-Owned Investors are publicly owned, and are, therefore, subject to politics,” the report says.
Global SWF head, Diego López, says the state-owned investment universe remains “both fascinating and challenging”.
“On the one hand, they are intrinsically linked to their hosting economies and finances and there are usually more issues at stake than just pursuing superior returns,” López says in the report. “On the other hand, because of their global and heterogeneous nature, everything that goes on in the world, from geopolitics and pandemics, to climate change and technological disruption, unequivocally affects them.”
NZS is ranked 32 by assets under management out of the 161 SWFs covered by the New York-headquartered researcher.
Formed in 2018, Global SWF publishes regular research on the state-owned investment universe as well as carrying out bespoke projects for individual funds.