Central banks, sovereign wealth funds and other government-owned investment groups are gearing up to implement important changes to their asset allocation and external fund management structure, according to a new report from State Street Global Advisors.
In the six-month period following the collapse of Lehman Brothers in September 2008, some SWFs suffered losses “of a magnitude to wipe out a decade or more of investment returns,” according to the report titled “Current Issue in Official Sector Asset Management” published Tuesday. The crisis served as “an extreme stress test” for the funds, said John Nugee, senior managing director of SSgA’s official institutions group and author of the report.
“Many have reassessed their risk appetites and loss tolerances,” Mr. Nugee said at a news conference Tuesday about the report. For example, many SWFs increased exposure to more volatile sectors in the early 2000s under the assumption that they have long-term investment horizons due to their indeterminate, possibly infinite, lifespan. But during the financial crisis, the more volatile assets suffered heavier losses and fund officials are now “rethinking this assumption,” Mr. Nugee said.
“They’re asking whether it is possible that a long-term fund can have a short-term investment horizon?” he said. A broader review of their investment approach, Mr. Nugee added, “will result in sovereign funds becoming more active this year and next year” as they make important changes to their portfolios.
“Asset reallocations to reflect the outcome of their analysis will need to be made,” according to the report. “In addition, new cash has to be put to work.”