The Invesco Global Sovereign Asset Management Study of 52 sovereign investors, representing $5.7trn of assets, revealed that just over half of them increased exposure to real estate in 2013 and 29% added to private equity, relative to their total portfolios.
All the major alternative asset classes, including infrastructure, hedge funds and commodities, are also expected to be added to in 2014, the study found.
This continued appetite was because many sovereign investors remained underweight in alternatives relative to their strategic asset allocation targets, and around 46% of them expected funding levels to increase in 2014.
A further reason lay in the fact that alternatives underperformed during 2013, with sovereign investors typically citing an average return of 7%, compared to a target of 8%.
Strategic tilt
Nick Tolchard, co-chair of Invesco’s Global Sovereign Group and head of Invesco Middle East, said: “It is clear that a strategic asset allocation strategy is driving sovereign investors to alternatives, rather than tactical allocation. The expected net increase in new funding this year is another key factor that explains this preference for alternatives, driven by increasing country surpluses and strong support from governments for their sovereign funds.”
He said many sovereign funds, especially those with assets in excess of $50bn, have yet to reach the asset allocation targets set five years ago for emerging markets and alternatives.
Within alternatives, global infrastructure was particularly popular, with 47% increasing exposure in 2013, compared to 22% in 2012.
The jump in the flow of assets into the emerging markets of Latin America, Africa, China, India and Emerging Asia, was similarly a strategic rather than tactical move.
The only emerging markets where weightings declined were central Eastern Europe and Russia, where tactical issues did come into play.
Tolchard said: “Despite allocations to emerging markets set to increase, a strong underlying preference for developed markets is still apparent, with sovereigns attracted by their depth, stability and diversification benefits.”
Other findings included an average increase in target returns, lengthening of time horizons and a decrease in home market allocations.
“Home market allocations usually account for a significant percentage of a sovereign investor portfolio – 42% on average across all sovereign investors in 2013 – so this globalisation is an important change,” Tolchard said.
The Middle East and Asia were the two regions most of the money was represented in the results, alongside the smaller sums in the West and emerging countries.
