More than one-third of sovereign wealth funds were called upon to support their local economies or plug fiscal deficits in 2020 in light of the COVID-19 pandemic.
Invesco's ninth annual Global Sovereign Asset Management Study found that 78% of liquidity sovereigns — with assets that are drawn upon in the event of economic shocks — were tapped for assets last year, compared with 58% of investment sovereigns, defined as those that are not investing with any specific liabilities to fund.
The mandate of liquidity funds also led such investors to keep their investment horizons short. Among liquidity sovereign wealth funds, the average investment horizon was 2.9 years in 2021, down from three years in the 2020 and 2019 surveys.
Other types of sovereign investors, however, lengthened their investment time horizons, with investment funds increasing to 11.3 years from 9.9 years in 2020 and 8.1 years in 2019.
"Overall, I would say it's a very positive story — sovereign funds met the need of what they were required to do in a year when there was a fair amount of upheaval," Rod Ringrow, head of official institutions at Invesco, said in an interview. "I'm not surprised, given the pandemic, that liquidity sovereigns" have become more focused on the short term, he added.
Overall wealth fund returns were slightly lower, at 7.3% in 2020 vs. 7.6% the year previous. But "all things considered for the year, (that was) actually a pretty good result," Mr. Ringrow said.
In terms of trends, one of the noticeable ones was a reversal in asset allocation preferences. Up until last year, sovereign funds were increasing their fixed-income allocations at the expense of equities, but this year they are dropping bonds. Fixed income fell to 30% of assets in 2021, from 34% last year and 33% in 2019's study. The average allocation to equities increased to 28% from 26% last year, although remained below a 30% allocation in 2019; and illiquid alternatives also fell slightly, to 19% from 20% in 2020, but still above the 18% exposure wealth funds had in 2019. Cash exposure grew to 9% in 2021 from 4% in 2020 and 5% in 2019.
Mr. Ringrow said the move away from fixed income was driven by a continued search for yield and a need for liquidity — which was "pandemic-driven." The increase in cash exposure was also "not surprising" given the pandemic.
The remaining average allocations were 4% liquid alternatives – steady vs. 2020 and up from 3% in 2019; and direct strategic investments, which dropped to 10% from 12% in 2020 and 11% in 2019.
The study was split into five themes: liquidity, ESG, China, real estate and central banks.
Invesco found that the pandemic increased the already-growing adoption of environmental, social and governance factors among sovereign funds. The proportion of sovereign respondents adopting an ESG policy at the organizational level grew to 64% from 60% in 2019 and from 46% in 2017. Among sovereign respondents, 23% said the COVID-19 pandemic was a catalyst for prioritizing ESG, while 45% of central banks included in the study agreed.
Regarding China, sovereign funds continue to view the market as appealing.
"When the pandemic broke we did see an initial flow to the dollar and U.S., but even back as (far as) last March, we saw clients looking at Asia as a potential bright spot in terms of where to invest," Mr. Ringrow said. "Sovereigns have been returning to APAC and China (as a) source of alpha."
Invesco asked sovereign wealth funds for their views on the attractiveness of China as an addition to portfolios over a three-year period. This year, China's attractiveness was rated 6.6 out of 10 in 2021, up from 6.1 in 2019 and 5.2 in 2017. The U.S., by comparison, scored 7.8 out of 10 in 2021 and 2019, and 8 out of 10 in 2017.
Mr. Ringrow noted that sovereigns are increasingly looking for private markets opportunities in China, such as those related to the digital economy and emerging middle class.
Mr. Ringrow also thinks China will be "compelled to focus more attention on ESG as part of a wider global footprint to move that forward," given in particular the path that the new U.S. administration is taking.
Real estate continued to be a popular allocation among sovereign wealth funds, although fell in 2021, to 8.3% from 9% a year before. However, real estate remained the biggest alternative asset class allocation for these funds, followed by private equity at 7.4%, hedge funds and absolute return funds at 3.9%, infrastructure at 3.7% and commodities at 0.5% allocation.
Invesco also surveyed central banks, finding that COVID-19 has pushed these entities to focus on risk. One-third of central bank respondents see a need for larger reserves, while allocations to liquidity tranches also increased.
Invesco surveyed 141 CIOs, heads of asset classes and senior portfolio strategists across 82 sovereign wealth funds and 59 central banks. These investors had a total $19 trillion in assets.