Cash, equity holdings help wealth funds through pandemic

Sovereign wealth fund portfolios largely proved resilient to the economic impacts of the coronavirus pandemic as they entered the crisis either overweight cash or underweight equities, research shows.

Further, only two of a sample of 10 sovereign wealth funds surveyed as part of the research have been called on by their governments to support public finances.

Research into institutional capital flows and interviews with a number of sovereign wealth funds found that many institutional investors held extra cash or fewer equity exposures prior to March. A report of the research said several of the funds surveyed had been expanding their liquidity positions between December and February, due to perceived high valuations among stocks. The research was conducted by the International Forum of Sovereign Wealth Funds, a voluntary organization of global funds, and State Street Corp., analyzing data as of April 22.

The report said there was no evidence of broad-based risk aversion among investors, and instead "selective risk taking within equities and fixed income," with investors recently adding to emerging market equities over developed market stocks; and 2-year Treasuries over 10-year Treasuries.

Investors also rebalanced portfolios. "Despite significant market price corrections, institutional investors maintained their exposure to equities and have recently expressed greater appetite for risk, supported by a clear stabilization in aggregate capital flows observed across asset classes," the report said.

The research suggests sovereign funds "have not undertaken large-scale liquidations to provide liquidity for governments as widely speculated," said Duncan Bonfield, CEO of IFSWF, in a statement accompanying the report. "In fact, only two of the 10 IFSWF members surveyed for this research said that they had experienced a call on their assets since the beginning of March. Instead, they've been able to use their cash position to satisfy private-equity managers' capital calls and invest in the long-term interests of their owners at a time of great uncertainty."

Of the two funds whose governments had sought money from the funds, one was an oil fund. Two further respondents of the 10 in the sample said they had been called on to support additional government projects since the onset of the crisis. Further details were not disclosed.

"These responses do not suggest widespread sovereign wealth fund liquidations to support government spending," the report said. Rather than drawing on sovereign wealth funds, several governments from oil-rich countries, including Kazakhstan, "have recently borrowed from the international bond markets to cover budget shortfalls," the report added.