Broader adoption has led to equities surpassing bonds as the leading asset class within sovereign portfolios, including those of central banks, according to investment management firm Invesco.
“As an aggregate and as a general trend, we’ve seen that the use of equities has increased partly because central banks are using equities more than they used to,” Zainab Kufaishi, Invesco’s head of institutional sales for the Middle East and Africa told Zawya in an interview in the company’s Dubai office.
Central banks have grown in importance in the investment community in recent years and while they have traditionally invested in sovereign bonds from G7 countries, as their reserves have grown to $12 trillion over the past five years, they have decided to diversify their investment portfolio, Kufaishi said.
Invesco found in its 2018 Global Sovereign Asset Management Study published on Monday that sovereign funds globally invested 33 percent of assets in equities, compared with 30 percent in fixed income. This was only the second time in a six-year period that equity allocations outstripped investments in bonds.
However, Kufaishi explained that regional sovereign wealth funds (SWFs) “have been active users of equities for a long time and many have had an overweight allocation to equities for decades because of their future generation nature”, meaning that the primary aim of funds is to produce sustainable returns for future generations.
Strong equity returns in 2017, on the back of a bull market for global equities, led to much higher average total portfolio returns across all sovereign wealth funds last year. Global SWFs achieved a record 9.4 percent return, versus a targeted 6.2 percent, Invesco said in the report. Despite this, and with the exception of liquidity sovereigns (funds that countries set up to provide a financial buffer in the event of a crisis), 2018 target returns have crept up to 6.5 percent, and sit above expected levels of returns for 2018 of 5.8 percent.
Some 126 sovereign funds were covered by Invesco’s study, with a combined $17 trillion worth of assets under management.
Source: Invesco 2018 Global Sovereign Asset Management Study
Cryptocurrencies are another instrument sovereign investors are looking into, though at present they are considered too volatile and speculative to invest in, Kufaishi said.
“SWFs are not ruling it out, (but) their mandate is to invest for future generations, their investment horizons are very long so it’s very difficult for them to invest in very volatile and potentially quite speculative investments,” Kufaishi said.
However, SWFs are gaining some exposure to the financial technology sector through investments in venture capital firms and funds.
Reda Gomaa, portfolio manager at Mashreq Bank, said his fund would not be investing in cryptocurrencies anytime soon.
“We don’t invest in cryptocurrencies at present,” he told Zawya. “Unless we have regulations from central banks we won’t be investing in them.”
For sovereign investors to view cryptocurrencies as an asset class, the market would need to be deep enough so that they could invest large sums of money, Kufaishi said.
“Consider a US$500 billion SWF, if they can have an allocation to cryptos, whether a basket of cryptos or one specific crypto, then they have to put in billions to really see a difference in their overall portfolio,” said Kufaishi. “The market needs to be liquid enough for them to be able to do that.”
Central banks are taking more of an interest, though, as digital assets need to be regulated at some point. However, they are more closely looking at using blockchain-based technology from a utilisation perspective than an investment perspective, Kufaishi said.
(Reporting by Tahani Karrar; Editing by Michael Fahy)
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