Sovereign wealth funds and central banks returned 9.4% in 2017, attributable mostly to the equity bull market, the latest study by Invesco said.
The group represents $17 trillion of assets, compared with 97 funds with $12 trillion in assets in the year-earlier study.
Funds increased the average allocation to equities to 33%, up from 29% the previous year. Fixed-income allocations averaged 30%, up from 29%; cash averaged 4%, down from 7%; and liquid alternatives allocations increased to 3% from 2%. Illiquid alternatives exposure was steady at 17%; and direct strategic investments fell to 13% from 16%. Private equity fell to 6.4% from 6.5% and real estate fell to 7.7% from 8.1%. Allocations to infrastructure grew to 3.2% from 2.1%; to hedge funds increased to 2% from 1.6%; and exposure to commodities grew to 0.6% from 0.3% on average.
Almost half of sovereign investors are incrementally or materially overweight equities, although some are not comfortable with the allocation, said the study. The study said 35% plan to reduce equity weightings over the medium term but it's expected to be small rather than significant. Plans to cut equity exposure are driven by views that valuations are high on both absolute and relative bases, while markets are at risk of a geopolitical or economic cycle-driven correction. The possibility of a trade war, China, valuations and inflation were cited as specific headwinds to equity markets.
Most respondents indicated they will continue to allocate to private markets going forward but will look to new regions rather than home markets. Initiatives including the "One Belt, One Road" project in China have helped make Asia-Pacific an attractive region for infrastructure, according to 64% of sovereign funds. North America infrastructure was cited as attractive by 41% of respondents and could improve if President Donald Trump's administration implement its infrastructure plan.
"Our study has once again highlighted how diverse sovereign investors' investment strategies are and their increasing willingness to think globally in terms of finding the right assets for their portfolios," Alex Millar, head of Europe, Middle East and Africa sovereigns and head of U.K. institutional business, said in a statement accompanying the study. "With sovereign investors seeing particularly strong outcomes over the past year, there is likely to be further evolution over the next 12 months as they become increasingly more sophisticated."