Invesco: SWF's Seek Safety In U.S., Germany As U.K. Allocations Fall

Jun 5 2017 | 11:57pm ET

Geopolitical uncertainty and limited options to increase risk asset allocations are forcing global sovereign wealth investors to make fewer portfolio changes than at any point in the last five years, according to a new survey by Invesco, while the U.S. ranks as the most attractive market for the third year running. 

The survey, named the Invesco Global Sovereign Asset Management Study, is the fifth annual in-depth report on the complex investment behavior of sovereign wealth funds and central banks. This year’s poll was conducted in person with 97 individual sovereign investors and central bank managers around the world representing some $12 trillion in assets, the company said in a statement. 

Key highlights of the study:

  • Sovereign investors see low interest rates as the greatest tactical asset allocation factor, driving increasing allocations to real estate as sovereigns look for alternative sources of income generation. However, the longer term implications are less certain with expectations of a gradual return from quantitative easing to quantitative tightening. Instead, Brexit and the U.S. election results are expected to grow in importance for future allocations (set to increase in importance by +82% and +68% respectively), as the implications of political shifts on investment performance become clearer.
  • Sovereign investors have ranked the U.S. as the number one market in terms of attractiveness for the past three years, and this year the country retains its top spot with a score of 8 out of ten. The U.S. is also the winner in terms of actual allocations, with 37% of respondents reporting overweight new flows to North America in 2016 relative to their total portfolio – higher than any other region – and a net 40% are planning to overweight further in 2017. This compares to only 4% who were underweight on new flows in 2016, and 4% who plan to do the same in 2017 – the rest (59% for 2016 and 56% for 2017) did not change or plan to change the weighting.
  • This attractiveness is driven largely by interest rate rises and confidence surrounding a "pro-business" corporate tax regime following Trump taking office in January 2017. However, long-term confidence is still restricted by uncertainty around whether Trump will deliver on policy promises and positive views on potential infrastructure investments in the U.S. are hampered by concerns about growing protectionism limiting access for foreign sovereigns.
  • The UK saw the biggest drop in attractiveness to sovereign investors, down to 5.5% from 7.5% last year. Brexit is seen as a significant negative for UK investment, and investment sovereigns with European interests questioned the future of the UK as an "investment hub" for Europe given uncertainty over taxes on imports and market access.
  • Sovereign investor allocations to the UK were down in 2016; 33% of respondents reported being underweight on new flows to the UK (higher than any other region) compared to 13% who reported new overweight positions to the UK, while the rest (54%) cited no change. However, when the fall of Sterling is taken into account, UK allocations remain relatively stable, with stated allocation declines of 15% likely linked to the corresponding drop by 16% in the value of the GBP relative to the USD.
  • Moving forward, 41% of sovereigns expect to introduce new underweight positions in 2017, compared to just 5% who are planning new overweight positions to the UK. The majority (54%), however, don't intend to make any changes to their allocation weightings as they wait to assess the likely longer-term impact of Brexit.   
  • A fall in sovereign investor allocations was seen in Continental Europe, from 12.8% of AUM last year to 11.2% this year, as the risk of wider EU disbandment appeared to be growing. However, Germany stands out from its European neighbors as one of the most attractive investment destinations globally for sovereign investors, increasing from 7% last year to 7.8% this year. Germany's popularity is attributed to its perceived "safe haven" status and positivity towards Germany has increased based on its economic strength. Please note, so called safe-haven assets do not imply risk-free investments.
  • The return environment has remained challenging for sovereign investors, who have on average underperformed their target returns by 2%. Over the past three years, governments have responded to poor economic performance by reducing new funding to sovereigns (on average down from 8% in 2015 to 5% in 2017) and cancelling investments (down from -1% in 2015 to -3% in 2017).
  • Over two thirds (67%) of sovereigns reported being overweight to global real estate in 2016, and 46% expect to be overweight this year. Figures were similarly positive for home market real estate, with 58% being overweight to this segment relative to their portfolio in 2016, and 38% expecting to be overweight this year. Sovereigns cited a range of reasons for increasing target real estate allocations: the scope to capture liquidity alpha, the potential to generate income matching mid to long-term liabilities, and the potential for internalization and control. 

"2016 was a challenging year for sovereign investors with concerns surrounding funding levels and return expectations remaining front of mind amidst added macro-economic and political uncertainty,” said Alex Millar, Head of EMEA Sovereigns, Middle East and Africa institutional sales at Invesco, in a statement.

“Demand for alternatives like infrastructure has been a consistent theme in past years, but this year the challenge of increasingly scarce supply is compounded," Millar added. "While investors have fewer asset allocation levers with which to respond, they are delving deeper into more supply-rich real estate markets, and looking to the U.S. and Germany for opportunity and economic strength."

Headquartered in Atlanta and founded in 1935, Invesco is a global investment management firm with more than $841 billion in AUM, $155 billion of which is deployed in alternatives including factor, smart beta, and liquid alternative strategies.

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...


FINalternatives Trending

From the current issue of