Sovereign Wealth Fund Investment Trends Report Overview

Introduction We published our first report on the sovereign asset management industry in 2013 following interviews with 43 sovereign investors. This year marks our fifth annual study with evidence-based findings based predominantly on face-to-face interviews with 97 leading sovereign wealth funds, state pension funds and central banks with assets in excess of US$12 trillion. Over the past five years we've noted a number of factors influencing sovereigns such as low interest rates, the falling oil price and reduced funding. This year however we note geopolitical shocks in developed markets are shaping decision making. When coupled with uncertainty over the end of quantitative easing, the commencement of quantitative tightening and ongoing volatility in currencies and commodities it’s clear sovereign investors are faced with a challenging macroeconomic and therefore investment environment. The first theme in this year’s report addresses the aforementioned factors and notes a continuing return gap between target and actual returns with asset deployment challenges limiting the ability for sovereigns to match strategic asset allocation targets. We note sovereigns are increasingly looking to evolve their business models through internalisation or investment partnerships to reduce management costs and improve placement efficiency. Geopolitical risks have led to an increased concentration on perceived ‘safe haven’ international markets such as the US, India and Germany as well as an increasing focus on home market allocations in an effort to reduce foreign currency exposure. We focus on real estate in our third theme, highlighting accelerated growth in the asset class. We examine the drivers for these allocations as well as setting out how and where assets are being deployed. Despite sovereigns being well placed to implement Environmental, social and governance (ESG) strategies due to their size and long-term orientation, the uptake of ESG practices by sovereigns appears to have varying success. We highlight sovereigns’ polarised perspectives on ESG investing across various regions. We conclude with a theme focused on central banks. This year we have expanded and segmented our central bank sample to understand differences in strategy and pace of change with respect to investment tranches across developed and emerging markets. We hope the unique, evidence-based findings in this year’s report provide a valuable insight into a fascinating and important group of investors. Alexander Millar Head of EMEA Sovereigns & Middle East and Africa Institutional Sales [email protected] +44 1491 416180 Ol Key themes Shift from investment strategy to business model The gap between target and actual portfolio returns along with declines in investment commitments are reshaping sovereigns’ strategic agendas. Increasing appeal of perceived ‘safe haven’ markets Geopolitical uncertainty is leading to a focus on perceived ‘safe haven’ international markets and home markets. Attraction to real estate for matching and flexible participation Sovereigns are increasing allocations to high-quality direct real estate given perceived return, matching and flexibility attributes. Environmental, social and governance (ESG) growth dependent on performance data Perspectives on ESG are polarised with supporters moving to further embed and integrate ESG in investment processes while non-supporters wait for evidence of investment implications. Central bank risk appetite driven by financial market exposure Central bank investment priorities and risk appetite vary according to the size of the country’s reserves and to the level of exposure to financial market shocks. HOUSE_OVERSIGHT_026681