In 2013 the “Invesco Global Sovereign Asset Management Study” revealed that government investors were seeing diversification due to volatility in equity markets and yield compression in the bond market, as well as a high correlation between bonds and stocks.
The demand for alternatives
This year the study found similar demand for alternatives, with 51 percent saying they would increase new exposure to real estate relative to the portfolio and 29 percent increasing new exposure to private equity. All of the major alternative asset classes – real estate, private equity, infrastructure, hedge funds and commodities – were projected to increase in 2014.
Trend in increasing alternative allocations looks structural
The study said the three-year trend in increasing alternative allocations looks to be structural, driven by strategic asset allocation, rather than a short term shift due to tactical allocations. The study noted that many of the larger sovereigns, with over $50 billion in assets, considered themselves underweight alternatives. This comes as forty six percent of sovereigns are estimated to receive increased assets this year to be managed. The increase in alternatives took place during a period when returns were slightly under their performance target of 8 percent annually.
Examples of such diversification, cited in a Bloomberg article on the topic, include Norway’s Government Pension Fund Global in 2010 decided to start investing in real estate, which accounted for 1.2 percent of assets in the first quarter. Korea’s sovereign wealth fund announced plans recently to double investments in alternatives over the next decade.
Real estate offer better yield than alternatives
“We are in a low-inflation environment generally, and what we are seeing is a search for yield,” Nick Tolchard, Invesco’s managing director of international development and sovereign investors was quoted in the report as saying. “Because of the long-term nature of alternative investments, state investors are prepared to go into real estate, into infrastructure deals in the long-term because they can get a very attractive yield.”
Invesco interviewed 52 investors for the study, most being sovereign wealth funds and pension funds, with close to twenty percent of respondents having more than $100 billion of assets under management.
While sovereign investors plan to increase allocations to emerging-markets, they expressed a preference for developed markets. The big winner was Latin America, which could see a forty three percent increase in allocations, followed by Africa, which could see a forty percent increase. China was expected to receive a thirty eight percent increase, while emerging Asia and India were expected to receive near a thirty percent increase in investment allocation.