Sovereign funds aim to attract internal equity expertise

Sovereign asset owners in Asia are poised to raise their equity exposures, bucking global sovereign counterparts which are largely scaling back equity allocations, a new survey by Invesco published today (July 20) shows. 

The survey, entitled Invesco Sovereign Asset Management Study 2020, polled 83 sovereign investors and 56 central banks between January and March this year. Institutions based in Asia accounted for 43.4% of the former and 28.6% of the latter.

Invesco declined to comment on the proportion of AUM of Asian sovereign investors and central banks, but global respondents held a combined $19 trillion at the end of that period.

The study noted regional sovereign investors allocated 19% of their assets to equities on average, and 33% of them were planning to increase their holdings in the asset class. In addition, 47% and 46% were looking to also do so in infrastructure and real estate.

On the contrary, over a third of global sovereigns – whose average exposure to equities stood at 26% – aim to dial back their allocations to these assets, with half of them seeking to cut them back by over 5% of equities. 

Speaking to AsianInvestor exclusively, Terry Pan, chief executive officer of Greater China, Southeast Asia and Korea at Invesco, said the shift towards equities among Asian sovereign investors did not necessarily reveal that investors were abandoning safe positions for riskier ones.

“When you look at how some of these fixed income instruments are priced at the moment, I think there are definitely views in the market that will challenge the notion that fixed income is safe in general,” he said. 

The full impact the Covid-19 pandemic on the global economy has not yet fully unfolded, with a recent spike in confirmed cases in the US stifling investors’ confidence. That means that certain pockets in the credit market could still warrant caution. In particular there is the potential that for a continuation of the worrying wave of “fallen angel” credits – or bonds issued by investment-grade companies that have since been downgraded to junk status. 

In addition, the low-yield rate environment has proven to be difficult for some sovereign investors, particularly sovereign asset owners that need to fund current or future liabilities. This problem is prompting more of them to seek longer-dated assets including infrastructure and real estate, which typically provide an illiquidity premium, said Pan. 

The situation is even more dire for Asian sovereign investors because they typically possess more exposure to fixed income assets. The survey noted that regional asset owner respondents allocated 38% of their AUM on average to these assets, higher than that of global sovereign investors, whose average exposure to fixed income stood at 34%. 

“For sovereign wealth portfolios with a chunky allocation to fixed income, it's going to be increasingly challenging to find returns,” Pan said. 

INTERNALISING EQUITIES 

The survey also asked how sovereign investors will go about raising their equity allocations. For many Asian investors the answer is simple: take them in-house. 

The study noted that 38% of regional sovereign investors planned on internalising their equity investments, higher than the global total (34%), though around a quarter of them were looking to engage external managers for that, also higher than the global total (8%).  

This was aligned with a trend in which equity investments are being slowly internalised over the years. The asset class, which was the second most-popular one to be brought in-house by global sovereigns this year (at 54% of respondents), were managed in-house by 34% of those polled back in 2015. Respondents cited control over investments (58%), better performance (33%) and lower management costs (31%) as the top three benefits for internalisation. 

AsianInvestor also understands that a Southeast Asian state pension fund is insourcing almost all of its equities allocation, with the institution engaging external managers more heavily on their offshore exposure. 

The biggest challenge according to the survey has been for sovereign investors to recruit and retain talented individuals. This has also impeded some from in-housing their asset management more aggressively.

“From an Asian sovereign standpoint, compared to their global counterparts, some of these sovereign funds are newer, [so] from an internalisation perspective their ability to attract talents is harder whether domestically or attracting people from overseas to work for them internally,” said Pan. 

Interestingly, he added that the Covid-19 outbreak could potentially help convince talented individuals working abroad back to their regions, given the impact the pandemic has had across the world on work culture or employee expectation. 

“From a talent perspective, do you necessarily want to work overseas in the current environment or do you want to be closer to home?” he said.