The 2021 Invesco Global Sovereign Asset Management Study (with fieldwork in H1 2021) reported a cautiously optimistic mood among sovereign wealth and public funds. Emerging from the worst of the pandemic, these investors welcomed the prospect of a more normal operating environment, deploying capital to risk assets.
Inflation ranked just seventh in terms of macro themes influencing allocations. The pandemic, climate change and low yields were considered much more pressing issues.
What a difference a year makes!
See results of the 2022 Invesco Sovereign Asset Management Study.
Inflation Shock & Stock-Bond Correlation
Inflation has surged; Consumer prices across OECD countries rose significantly, the fastest pace of increase in at least three decades, and still trending upwards.
This has already produced the largest year-to-date drawdown in bond market history. As a result, instead of shielding portfolios in a risk off environment and sharp correction in equities, fixed income allocations have been a major contributor to negative performance. This positive correlation presents challenges for sovereigns as they look ahead.
Private Markets & The Illiquidity Premia
A key challenge for large public funds is capacity, with sources of alpha in public markets often difficult to deliver at scale. One solution has been an increase in allocations to private markets, which allow sovereigns to put sizeable blocks of capital to work while also capturing long-term returns, illiquidity premia, and diversification benefits. This year private market allocations accounted for 22% of portfolios on average, up from 18% in 2019. Allocations are even higher among the largest funds (AUM > $100 billion) at 27%.
Rising Impact of ESG
ESG integration continues to rise, with a growing focus on delivering on measurable targets. This is helping drive increased use of impact investing, which is seen as a way for sovereigns to help fund the transition towards low carbon energy. The invasion of Ukraine has highlighted the limitations of implementing ESG via passive strategies and led to an increased focus on active investing.
Digital Assets: Gathering Momentum?
Sovereigns are researching digital assets but taking a conservative approach to investment. Direct investment into companies that provide digital asset infrastructure is the preferred approach to gaining exposure. Meanwhile, central bank digital currencies (CBDCs) are being heavily researched and are seen as a potential threat to the long-term viability of existing cryptocurrencies.
Implications for Portfolio Strategy
In partnership with Invesco, this investor roundtable will examine the new investment regime and discuss how sovereign and public funds can build inflation resilience, restructure asset allocation strategies, incorporate sustainability and explore innovative opportunities.
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