Sovereign funds increase alternatives allocations - survey

The Invesco Global Sovereign Asset Management Survey shows that sovereign investors have had difficulty meeting return targets over the last two years; across the investors surveyed, average expected returns for 2015 were 4.1%, well short of the average target of 5.9%. This year is expected to see a similar shortfall, with an average target of 5.7% but expected actual returns of 4.4%.

Invesco identified falling oil prices and returns on non-US government bonds as major contributors to the drop in returns. Oil fell by $60 per barrel between the first quarter of 2014 and the first quarter of 2016, while over the same period yields on 10-year German and Japanese government bonds dropped from 1.5% and 0.6% to 0.1% and -0.1% respectively. Funds that invested in US government bonds tended to do better, due to the effects of the strengthening currency.

In response to these trends, global fixed income allocations for sovereign investors have declined steadily, from 25% of survey respondents' portfolios in 2012 to 16% in 2015. Over the same period allocations to alternative assets - defined in the survey as real estate, infrastructure and private equity - have nearly doubled, from 7.5% in 2012 to 13.8% in 2015.

While allocations to all categories of alternative investments have increased, real estate has seen the most growth, from 3% in 2012 to 6.5% in 2015; by comparison, infrastructure grew from 1.4% to 2.8% and private equity grew from 3.1% to 4.5%.

Invesco attributes the difference in growth rates to challenges faced by sovereign funds when sourcing deals in infrastructure and private equity. While real estate presents similar difficulties, deploying capital in this sector tends to take an average of two years, compared to 2.3 years for PE and 3.5 years for infrastructure, making it more attractive to investors.

Along with increasing their real estate investments in absolute terms, sovereign investors have shifted their allocation patterns away from high-profile assets in major cities such as New York and London, and toward more diversified global assets. Investors are also increasingly seeking direct investments or operator and developer partnerships, rather than going through fund managers.

In addition, the survey found that average sovereign investor portfolio allocations to China fell between 2014 and 2015 from 2.2% to 1.7%, while allocations to Asian emerging markets rose from 1.6% to 2.3%. The declining interest in China is driven by concerns over the country's shrinking labor force and corresponding growth in manufacturing costs, while the appeal of emerging Asia chiefly comes from increasing political stability and improvements in infrastructure.

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• Topics
• LPs
• Investments
• Performance
• Fundraising
• Asia
• Sovereign wealth fund