Sovereign wealth funds show signs of returning to fixed income and cash

The new report by IFSWF and State Street also found strong capital outflows from emerging markets and currencies close to Russia and Ukraine.
Sovereign wealth funds show signs of returning to fixed income and cash

Sovereign wealth funds are taking a risk-off approach as global investor confidence dropped 6.6 points, according to research by the International Forum of Sovereign Wealth Funds (IFSWF) and State Street.

The report, which was released on Tuesday (April 26), revealed that institutional investors are slowing their exposures to equity, and adding to fixed income and cash.

“Following a period of opportunistic rebalancing and selective risk-taking during 2020, the past year has seen institutional investors moving towards safer assets and markets,” Neill Clark, head of State Street Associates, Europe, Middle East and Africa (EMEA) said.

 “As economies around the world emerged from the long shadow cast by the Covid-19 pandemic, investors are faced with new risks. Today, risk assets are re-pricing due to international conflict, inflation, and central bank policy responses.”

Separately, State Street’s Global Investor Confidence Index for April, released on Wednesday (April 27), dropped 6.6 points from March to 92.9. A reading of 100 is neutral.

The drop was most marked in North America, which decreased by 8.0 to 95.2. In Europe, the index fell 6.7 points to 76.2 and while Asia saw a 2.4-point rise, confidence was still within the negative range at 92.0.


According to IFSWF, sovereign wealth funds have taken a risk-off approach as well, shifting from risk assets to fixed-income and cash.

The report cited Raphael Arndt, chief executive of Australia’s Future Fund, who said the sovereign wealth fund’s portfolio is positioned with a neutral risk setting and it has “taken some risk off, particularly in the listed equities programme, given the run-up in prices and our view is that risk is likely to be less well-rewarded in future.”

“When it comes to the investment strategies of sovereign wealth funds, most are taking the long view, which can sometimes mean a contrarian stance,” said Duncan Bonfield, IFSWF’s chief executive. “For example, one of our members has increased its emerging-market equity positions as the value/price gap widened, as emerging-market equity was cheaper than it was six months ago relative to its fair value estimates.”

The report found strong capital outflows from emerging markets, matched by demand for developed market stocks.

The investors showed interest particularly in defensive sectors such as consumer staples and utilities, “which is unsurprising as volatility has risen in response to military actions in Eastern Europe,” the report wrote.

Geopolitical risk has also had an impact on fixed income allocations and foreign exchange. Emerging market sovereign debt saw capital outflows, while developed-market sovereign bonds maintained stable capital inflows, despite rising domestic inflationary pressures.

The report also found strong outflows from currencies close to Russia and Ukraine, and inflows to currencies that were geographically disconnected from the two countries.

“This pattern has the potential to continue, with investor positioning remaining close to neutral territory despite recent moves,” the report wrote.

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