Sovereign investors took advantage of market dislocations caused by the coronavirus pandemic, using dry powder to snap up opportunities.
The “2020 Invesco Global Sovereign Asset Management Study” found that these asset owners used cash amassed in 2019 to take advantage of "unparalleled buying opportunities as the COVID-19 pandemic caused asset prices to plummet." It was one of five investment themes for sovereign investors, money manager Invesco said.
A number of the 139 institutions included in the study, representing a total of $19 trillion in assets, benefited from rebalancing rules that require purchases when allocations drop below set levels. One fund bought up AAA-rated bonds when prices hit a certain level, using dry powder amassed "for the end of the cycle," the study said. The study covered 83 sovereign wealth funds and 56 central banks.
"We've seen some nimble work from the sovereigns to ... take advantage of the dislocations in the market," Rod Ringrow, head of official institutions at Invesco, said in an interview.
The 2020 study, conducted January through March, showed sovereign investors continued to move away from equities over the past year, with the average allocation at 26%. That compared with 30% in the 2019 study.
"There's increasing attraction to fixed income, and within that, alternative credit. And (sovereigns are) really looking at the illiquids space — infrastructure and real estate," Mr. Ringrow said.
The second major theme that emerged from the study was a "war for talent," with sovereign wealth funds focusing on how to bring the "right people" in-house for investment, while central banks worked on hiring the right money managers.
The key driver for the internationalization of investment processes was not a cost issue, but "wanting greater control of those assets and understanding what's happening to those assets," Mr. Ringrow said.
The proportion of equities managed internally grew to 54% in the 2020 study, from 34% in Invesco's 2015 study. Fixed-income assets managed internally grew by 1 percentage point to 58% over the period, while private equity assets run in-house at sovereign funds grew to 50% from 28% in 2015. Real estate was flat at 42% and infrastructure assets run in-house grew to 41% in the 2020 study vs. 16% in 2015.
Sovereigns are also looking at how to develop talent. "It's easy to hire staff, but harder to retain the staff," Mr. Ringrow said, adding that it's difficult to keep staff from being poached by the private sector.
Diversity and inclusion also moved up the agenda for sovereign investors. The top reason incorporating such initiatives for emerging markets, West and Middle East-based investors was to better reflect the local population, while for Asia-based investors the top motivation was anticipation of better performance.
The third and fourth themes related to central banks. The third was an increasing use of gold by central banks as an alternative to zero or negative-yielding government debt rather than as an inflation hedge, Mr. Ringrow said.
Some central banks have moved into exchange-traded funds, futures and swaps to add exposure to gold in their reserve funds.
The average allocation to gold among central banks rose to 4.8% in 2020's study, from 4.2% last year and 3.5% in 2015.
When it comes to funding the gold allocation, 80% of central banks chose to do so at the expense of existing dollar-assets. "This is an important point, because it highlights the dilemma faced by a number of central banks: How to diversify away from the U.S. dollar without sacrificing liquidity and convertibility — for many, gold has been a convenient solution," the study said. The trend was particularly prominent among emerging market central banks, with almost 90% reallocating from dollar-denominated allocations.
Another theme among central banks is a move toward "testing resolve in risk assets," the study said. There was evidence of a diversification away from the U.S. dollar, with central banks moving into yen and renminbi-denominated assets.
However, "COVID has probably put a bit of a break on that," Mr. Ringrow said.
The final theme, across sovereign investors, is the continued development of environmental, social and governance issues, which are "now front and center" and every investor is grappling with, Mr. Ringrow said.
Among the respondents, 83% believe climate change requires immediate action and 68% said climate change will substantially hamper growth in global GDP. However, investors stopped short of recommending a carbon tax, with 53% disagreeing that one is needed, the study said.