Sovereign wealth funds and other institutional investors are gradually adding risk assets back into portfolios as the COVID-19 pandemic lingers, with investors deploying some accumulated cash and reducing fixed-income positions.
A report by the International Forum of Sovereign Wealth Funds and State Street found that institutional risk sentiment across asset classes also broadly improved in the period to March, particularly for foreign-exchange, commodity-sensitive assets and equity reallocations.
Investors started 2021 with a more neutral stance across asset classes than the underweight positions in risk assets they held in 2020, the report said. Cash levels still remain high but "there is evidence of a sustained rotation from cash and fixed income into equities since July 2020," the report added.
Investors also added to their U.S. equity positions in 2020, with IFSWF data showing that sovereign wealth funds invested more than $16 billion in 46 deals last year, vs. $2 billion in 28 deals in 2019. The uptick was largely driven by countercyclical investments in energy, consumer and financial sectors by Saudi Arabia's Public Investment Fund, Riyadh, in the second quarter. The fund has about $350 billion in assets.
Data also suggest that while institutional investors in general withdrew from U.K. exposures, sovereign wealth funds increased allocations to $4.4 billion in 2020 vs. $1 billion in 2019. Almost two-thirds of these investments were in private markets.