SSGA: Intra-SWF diversity continues to grow

SSGA: Intra-SWF diversity continues to grow

13 maart 2024

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Investment trends among sovereign wealth funds show stable asset allocation and less volatile returns.

‘Returns for sovereign wealth funds (SWFs) have been exceptionally volatile since 2020. 2021 was a year of exceptional growth: SWFs returned 17%, the highest since records began in 2008,’ State Street Global Advisors (SSGA) says today. ‘By contrast, 2022-2023 was a period of bust and recovery, with markets feeling the effects of the inflationary shock and the sharp policy rate increases that followed, in addition to broader geopolitical shocks. Returns in 2022 were -11%, the lowest on record, second only to losses during the 2008 Global Financial Crisis. In 2023, markets rebounded and SWFs expect a return of about 12%. With total assets of $ 10 trillion, SWF account for 6% of the total global portfolio of investable assets. This is particularly pronounced in private markets, where we estimate the SWF share to be about 14%.’

SSGA notices the following trends for the SWF market:

  • ‘Fixed income

    Protection against inflation: Reflecting more caution, there is a move away from plain vanilla bonds towards asset classes that offer more protection from inflation, for instance, inflation-linked and asset-backed securities.

    Larger versus smaller SWFs: While larger SWF have continued to reduce (32% in 2022), smaller funds have continued to increased allocation to fixed income (45% in 2022).

  • Equities

    Stable allocation: The overall share of assets devoted to public equities has not materially changed and has been stable since the mid-2010s at about 38% of assets, with no meaningful differences between regions, fund size or fund nature.

  • Private markets

    Growth rate: Private market investments of SWFs have continued to grow in nominal terms, reaching $ 2.6 trillion in our sample, with a net increase of $ 556 billion since 2020. However, the rate of annual growth has slowed in the higher rate environment. Relative to 2020, the share of SWFs’ AuM that is invested in private markets remains unchanged at 25% as of end-2023.

    Private equity: Comparing sub-asset class choices, private equity is by far the preferred choice comprising 46% of all private market assets.

    Middle East and North Africa: Regionally, investment funds from MENA have had a strong tilt towards private markets, specifically private equity. Total private allocation in MENA as of 2023 was about 25% higher than in other well-represented regions.

 SWF asset allocation is approaching a steady state of roughly 35-40-25 (fixed income - equities - private markets), with the scope of private market investments being largely a function of an individual fund’s ability to cope with illiquidity. That said, intra-SWF diversity continues to grow as the respective mandates and fund sizes imply different tactical and strategic asset allocation priorities. Finally, long-term returns for the group are robust, though more on a risk-adjusted basis than at a headline level.’

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