Historically, government bonds have been an asset allocation
staple of sovereign wealth funds. Central bank monetary policy
is making a significant impact on sovereign debt markets. In
the euro zone alone, 26 percent of European government bonds
and 54 percent of German Bunds are trading on a negative yield.
These unprecedented low yields have pushed SWFs to reassess
their weightings and readjust their portfolios.
There has been a global proliferation of SWFs. Roughly half
of the funds came into being during the past eight years; three
quarters have been in existence since 2000. A further 22
jurisdictions are considering launching their own SWFs.
Additionally, since 2002 assets under management of this group
of institutional investors have been growing at an
unprecedented rate more than 15 percent a year
and this upward trend doesnt look set to end, with assets
forecast to grow from $7.1 trillion to $10 trillion by
Thanks to their massive wealth, SWFs can access a range of
asset classes, factors and strategies that short-term investors
cannot. This combination can lead to greater diversification
potential and has prompted an expansion into alternative
investments, such as
real estate, infrastructure and the private markets, as
SWFs harness the premium associated with more illiquid assets
and with being a countercyclical investor.
In the traditional fixed-income markets, SWFs have shown
interest in the broader credit markets especially in the
area of loans and mezzanine finance as well as
high-yield and emerging-markets debt. There has also been a
noticeable increase in allocations to equities, both public and
private, especially in markets that have improving
fundamentals, such as the U.S. and Western Europe.
Long popular among SWFs, real estate offers excess spreads,
inflation protection and stable yields. To access such assets
cost-effectively, SWFs continue to leverage their relationships
with asset managers to source investments. Direct transactions
topped $50 billion during the first half of 2014, up 23 percent
from a year prior. Competition continues to build within this
sector, however, and bids for high-quality, core real estate
assets are hotly contested, most notably in London and New
York. Consequently, SWFs are considering more
opportunistic real estate segments, such as shopping malls
and development projects. Interest in investing in
international infrastructure continues to grow very noticeably,
especially given the growing demand for patient capital to
finance these long-term projects, as evidenced by a significant
increase in both direct- and co-investment transactions.
One other feature worth noting is the rapid growth in
SWFs foreign office outposts to handle their growing bevy
of international investments. Take two sovereign funds from
Southeast Asia: Singapores
Temasek Holdings and Malaysias
Khazanah Nasional, which have 11 and four offices abroad,
respectively. As SWFs continue their migration to proactive
investment management around the world, asset managers who wish
to partner with them will need to evolve and understand the
global solutions combined with clear thought leadership to
serve this fast-growing segment of investors.
Patrick Thomson is global head of sovereigns and head of
institutional business in Asia (ex-Japan), Australia, the
Middle East and Africa, at J.P.
Morgan Asset Management in London.
See J.P. Morgans disclaimer.
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