In response, 28% of these investors — comprising 142 CIOs, heads of asset classes and senior portfolio strategists across 85 sovereign wealth funds and 57 central banks — expect to increase their strategic allocation to fixed income over the next 12 months, followed by an increase in infrastructure (25%).
However, the way fixed-income allocations are managed is undergoing a rethink, the study said.
"Notably, during the 2022 asset price correction, fixed income failed to provide protection, and sovereign investors with the highest exposure to fixed income were among the worst performers," it said.
As such, investors are favoring a more active and tactical allocation to fixed income, rather than "set and forget."
Investors are also looking at emerging markets debt, high-yield debt and private credit, Rod Ringrow, head of official institutions at the firm, said in an interview.
The study found that 71% of investors expect emerging markets to either match or better developed markets performance over the next three years, and 29% intend to increase allocations to emerging Asia-Pacific markets this year.
"They're looking for that extra yield out of the fixed-income bucket. In many cases, many of the sovereigns are looking at private credit as its own bucket rather than lumping it in with general fixed income," he added.
Sovereign investors' investment objective horizons have also extended, for the sixth consecutive year. Sovereign wealth funds reported an average investment horizon of 11.3 years, vs. 10.7 years as reported in the 2022 study.
Liquidity sovereigns — which are characterized by their shorter time horizons — reported a notable uptick in investment horizon, to 4.3 years up from 3.3 years in the previous survey. Mr. Ringrow noted that, surprisingly, liquidity sovereigns were also looking at infrastructure, which he said may be a part of a plan to regenerate economies.
Geopolitical concerns also remain on investors' minds, with 72% of investors citing it as a risk to global growth over the coming year, and 79% highlighting geopolitical risk as a worry over the next 10 years.
Geopolitical concerns and emerging market opportunities also led central banks to diversify their currency holdings. These investors are increasingly allocating to emerging market currencies, looking to hedge volatility and seeking higher growth and returns, Mr. Ringrow added.