Sovereign wealth funds: Predictions for Year of the Rabbit

With the Lunar New Year set to being this weekend, we take a look at what to expect from sovereign wealth funds over the next 12 months.

PROTECTION STRATEGIES BECOME IMPORTANT

With so many variables still up in the air – the trajectory of inflation, central bank actions, a looming recession in developed markets  - SWFs will be wondering what they can do to protect the value of their investments.

Some experts believe that hedge funds allocations could increase this year, given they were one of the few asset classes that turned in a positive performance.

Not all strategies did well – most outperformers were broadly commodity trading and macro strategies.

Expect a lot more interest in hedging strategies, as asset owners hunt for strategies that are uncorrelated with bonds and equities (both of which suffered in 2022).

Still, is it a case of jumping on the hedge fund bandwagon after the best is behind us? Probably not, given that the concerns surrounding investments and the broader macroeconomic outlook continue well into the Year of the Rabbit.

MORE INTEREST IN OVERSEAS OFFICES

With business travel coming back, there will likely be more interest in meeting people physically to do business.

And while the world may have done business virtually during the height of the pandemic era, handing out external mandates and engaging in direct investments or co-investments works a lot better when people are on the ground and meetings can take place face to face.

In the quest for better returns, SWFs, along with other asset owners, will become more willing to open offices in potential investment locations, especially as Covid-19 restrictions ease globally.

There are already rumours of Harvard University’s giant Endowment Fund opening an office in Singapore, along with a few Canadian pension funds in 2023.

Saudi Arabia’s Public Investment Fund and other Middle East wealth funds are seeking to strategically cultivate deeper ties with China, India and the rest of Asia. This will mean the eventual expansion of their physical presence in the region by way of offices and investment teams.

Will it all happen this year? Not necessarily but expect to see small steps in this direction.

DATA MINING, PROCESSING GAINING TRACTION

With financial markets changing at such rapid pace, and the evolution of big data, there is growing pressure on SWFs, as well as other large institutional investors, to ensure their systems and processes for investing are better plugged in to investment needs.

Several asset owners in the region, including central banks, have been busy upgrading their back and middle offices to ensure they are able to cut costs, improve efficiencies and mine the voluminous amounts of data they receive into actionable insights.

It’s a slow process but it is happening across the region.

Especially as investments become more complex, the ability to handle data smartly becomes critical.

ESG CONSIDERATIONS GROW STRONGER

SWFs usually have a social contract embedded in their charters to ‘do good’ with the billions of capital they have at their disposal.

It’s not always about how much money they can make in a project or investment, but also how that project can potentially impact people’s livelihoods and the environment.

Those considerations have always existed but expect these issues to take on a much more visible persona as sustainability, especially climate change, become a huge topic of discussion among investors.

One interesting trend could be potential tie-ups between public pension funds and SWFs to create more impact in sustainability issues.

Clean energy, green energy transition and ‘just transition’ are tipped to become bigger factors in their investment considerations.

WATCH THE MIDDLE EAST FUNDS

In 2022, five of the most active sovereign investors were from the Middle East, according to research consultancy GlobalSWF.

Middle East funds have been making their presence felt quite strongly in Asia as well.

Abu Dhabi Investment Authority, Mubadala, and the Public Investment Fund are just a few examples of funds that either have a presence in the region, have investments or both.

The Hong Kong government is also going all out to woo large Middle East investors. They have already approached wealthy Middle Eastern families to set up  family offices in the city; expect more initiatives towards large institutional investors as well.

Middle East funds have also doubled their investments in developed markets over  the past 12 months, according to GlobalSWF. Expect them to be equally if not more active this year.

Watch this space.