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Asset Owners

PwC: Sovereign wealth funds increasing allocations to alternatives

Almost one-quarter of sovereign wealth fund assets are allocated to alternative asset classes, shows a report by PricewaterhouseCoopers.

The report — "The Rising Attractiveness of Alternative Asset Classes for Sovereign Wealth Funds" — found that 23% of a total $7.4 trillion in sovereign wealth fund assets is now invested in private equity, real estate, gold, infrastructure and other alternative assets.

PwC said that despite sovereign wealth funds facing adverse conditions since 2014 — when asset inflows began to stall as a result of falling oil prices — total assets continued to grow. Total assets increased 21% over the three years to year-end 2016, to $7.4 trillion.

Increased allocations to alternatives, from 20% as of year-end-2013, came at the expense of fixed income. Fixed-income assets accounted for 30% of total SWF assets in the PwC study as of year-end 2016, compared to 40% at the end of 2013. The equities allocation of these funds increased to 44% at the end of 2016, from 37% as of year-end 2013. The remaining 3% of assets was allocated to other investments at the end of both periods for both dates.

Private equity is becoming a mainstream option for sovereign wealth funds, with 6.1% investing in the asset class in 2016. The typical allocation was 6.1% in 2016, vs. 3.7% in 2011, according to PwC.

The firm said it expects allocations to alternatives to increase in the future as they offer increased diversification, principal protection, an inflation hedge and increased performance across portfolios. However, investors must be mindful that investing in these assets might introduce illiquidity risks, complexity and cyclical issues.