Sovereign wealth funds continue to invest predominantly in alternatives, but asset accumulation has slowed down considerably, according to a report issued by State Street Global Advisors.
The report — "How Do Sovereign Wealth Funds Invest? Shift into Alternatives Continues" — estimates that by the end of 2016, sovereign wealth funds had roughly $6 trillion in assets, 11 funds had more than $100 billion each and 30 out of 37 funds had invested in alternatives.
By comparison, in 2002, the total assets of sovereign wealth funds was around $790 billion. There were only 21 sovereign wealth funds, with most of the assets concentrated among a few large funds (the top seven held 87% of global assets). Only nine funds were invested in alternatives and only two had assets more than $100 billion in 2002.
From 2014 to 2016, sovereign wealth fund assets grew by 3% annualized compared to 15% from 2012 to 2014. Despite favorable market conditions, 35% of sovereign wealth funds experienced a decline in assets from 2014 to 2016 mainly due to government withdrawals, vs. 10% of funds from 2012 to 2014, according to the report.
Sovereign wealth funds own 6.3% of global publicly listed equity, while their $1.6 trillion private market holdings amount to more than 15% of the entire global alternatives market, according to the report.
"While SWFs are growing less rapidly than before and some such as oil funds face longer term challenges, they continue to constitute a significant proportion of the global investor universe," the report said. "As a result, their asset allocation decisions may affect a variety of markets and are worth paying attention to."
Looking ahead, SSGA expects sovereign wealth funds' asset allocation to continue to evolve, either in response to changing market conditions or to factors such as high outflows. However, their asset mixes could begin to stabilize "as fixed-income investments do not carry the same opportunity cost they once did and investing in alternatives is hitting institutional limits," the report said.
SSGA's report notes a few signals suggest that the trend of rapid asset growth among sovereign wealth funds is coming to an end.
For one thing, the oil market — the proceeds from which account for at least a half of all SWF wealth — has been reshaped with new spare capacity that could cap a rise in commodity prices.
For another, the other large source of sovereign wealth accumulation, growth in foreign-exchange reserves, is slowing as many emerging markets move towards consumption-based economic growth and aging populations increase fiscal pressures on sovereign wealth fund owners, the report said.