An annual survey reveals the preferred investment destination of a select group of investors
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Invesco has released its fifth annual Global Sovereign Asset Management Study, which delves into the complex investment behaviour of global sovereign wealth funds and central banks. For this year, 97 individual sovereigns and central bank reserve managers across the world, including Canada, were asked to rate the importance of various economic and geopolitical factors to their investment strategies.
“Our study has once again illuminated how these diverse investors are responding to global trends as they become ever more sophisticated, yet limited by both external and internal constraints,” said Alex Millar, head of EMEA sovereigns & Middle East and Africa, Institutional Sales at Invesco.
While sovereigns saw low interest rates as the most significant tactical asset allocation strategy, political events such as Brexit and the election of US President Donald Trump are expected to increase in importance by 82% and 68%, respectively, for future allocations.
The US was voted as the most attractive market for the fourth year in the row, with a score of 8 out of 10. The country also beat out others in terms of actual allocations, with37% of respondents saying they’re overweight new flows to North America in 2016 relative to their total portfolio. A net proportion of 40% of sovereign investors have plans to remain overweight in 2017.
Making the US attractive to such investors were rising interest rates and market confidence in a pro-business corporate tax regime under the Trump administration. However, long-term confidence in Trump’s ability to deliver on policy promises is limited. Optimism from potential infrastructure investments in the US is also offset by concerns of limited access for foreign investors due to protectionism.
Because of Brexit, the UK experienced the biggest decline in attractiveness among sovereigns, sliding to 5.5 from 7.5 last year. Sovereigns with interests in Europe also questioned the UK’s future as a European investment hub, since uncertainty surrounds taxes on imports and market access to the country.
Sovereign allocations to the UK were severely hampered, with 33% of respondents reporting being underweight on new flows to the region in 2016. By considering the decline in the pound’s value, however, UK allocations are relatively stable; reported allocation declines of 15% were likely linked to a 16% drop in the value of the British pound sterling relative to the greenback. The devaluation of the GBP has also led to a rally in UK stocks.
Continental Europe sustained a fall in allocations, from 12.8% of AUM last year to 11.2% of AUM this year, as risks of widespread EU disbandment increase. Germany, however, remains an attractive investment destination, its score increasing from 7 last year to 7.8 this year; the country’s “safe haven” status and economic strength have contributed to its popularity and sovereigns’ increasing positivity toward it.
Sovereign investors have also reported an average underperformance of 2% relative to their target returns, mainly due to a challenging return environment. Governments have responded to poor economic performance by reducing new funding to sovereigns (from an average of 8% in 2015 to 5% in 2017) and cancelling investments (from -1% in 2015 to -3% in 2017). Alternatives like infrastructure have been continually sought over the past years, although scarce supply remains an ever-increasing challenge.
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“Our study has once again illuminated how these diverse investors are responding to global trends as they become ever more sophisticated, yet limited by both external and internal constraints,” said Alex Millar, head of EMEA sovereigns & Middle East and Africa, Institutional Sales at Invesco.
While sovereigns saw low interest rates as the most significant tactical asset allocation strategy, political events such as Brexit and the election of US President Donald Trump are expected to increase in importance by 82% and 68%, respectively, for future allocations.
The US was voted as the most attractive market for the fourth year in the row, with a score of 8 out of 10. The country also beat out others in terms of actual allocations, with37% of respondents saying they’re overweight new flows to North America in 2016 relative to their total portfolio. A net proportion of 40% of sovereign investors have plans to remain overweight in 2017.
Making the US attractive to such investors were rising interest rates and market confidence in a pro-business corporate tax regime under the Trump administration. However, long-term confidence in Trump’s ability to deliver on policy promises is limited. Optimism from potential infrastructure investments in the US is also offset by concerns of limited access for foreign investors due to protectionism.
Because of Brexit, the UK experienced the biggest decline in attractiveness among sovereigns, sliding to 5.5 from 7.5 last year. Sovereigns with interests in Europe also questioned the UK’s future as a European investment hub, since uncertainty surrounds taxes on imports and market access to the country.
Sovereign allocations to the UK were severely hampered, with 33% of respondents reporting being underweight on new flows to the region in 2016. By considering the decline in the pound’s value, however, UK allocations are relatively stable; reported allocation declines of 15% were likely linked to a 16% drop in the value of the British pound sterling relative to the greenback. The devaluation of the GBP has also led to a rally in UK stocks.
Continental Europe sustained a fall in allocations, from 12.8% of AUM last year to 11.2% of AUM this year, as risks of widespread EU disbandment increase. Germany, however, remains an attractive investment destination, its score increasing from 7 last year to 7.8 this year; the country’s “safe haven” status and economic strength have contributed to its popularity and sovereigns’ increasing positivity toward it.
Sovereign investors have also reported an average underperformance of 2% relative to their target returns, mainly due to a challenging return environment. Governments have responded to poor economic performance by reducing new funding to sovereigns (from an average of 8% in 2015 to 5% in 2017) and cancelling investments (from -1% in 2015 to -3% in 2017). Alternatives like infrastructure have been continually sought over the past years, although scarce supply remains an ever-increasing challenge.
For more of Wealth Professional's latest industry news, click here.
Related stories:
Indie investment firm expands income ETF offering
NEO announces platform support for OM funds
