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Mideast sovereigns increase equity and private market allocations

Majority of regional sovereign investors use actively managed strategies

Image Credit: Supplied
Zainab Kufaishi
Gulf News

Dubai: Middle East sovereigns are the most committed users of active management, with an average of 65 per cent of portfolios actively managed, according to the latest Invesco Global Sovereign Asset Management Study.

The study, sixth in the series found that the Middle East sovereign investors also often pursue opportunistic strategies in less traditional, less efficient markets where active management can potentially deliver significant alpha or the excess return of an investment relative to the return of a benchmark index.

The study notes that regional sovereign investors have a significant internal active equity team, which means that the cost implication of higher use of active strategies is muted.

Asian sovereigns have a relatively similar profile in being significant users of active management, driven largely by the perception that their local equity markets are less efficient than the US and Europe, as well as having longer average holding periods for their equity mandates.

This year’s study was conducted face-to-face among 126 individual sovereign investors and central bank reserve managers across the globe representing $17 trillion (Dh62 trillion) of assets, of which 62 are central banks, reflecting their growing status as sovereign investors.

Strong outcomes

According to the study, average allocation to equities have increased to 33 per cent this year from 29 per cent in 2017. The increase in equity allocations has been driven by a number of factors, including the equity bull market. On average, equity returns were 8.7 per cent among respondents, which significantly supported strong outcomes at portfolio level (9.4 per cent in 2017, up from 4.1 per cent in 2016).

“Whilst sovereigns remain increasingly committed to equities as a core growth asset, there has been a real shift within these equity portfolios. Although passive strategies have been major beneficiaries, it is far more nuanced than a movement from active to passive; portfolio traffic is actually moving in multiple directions,” said Zainab Kufaishi, Head of Institutional Sales for Middle East & Africa at Invesco.

With allocations to equities increasing over the past five years, nearly half of sovereign investors are now incrementally or materially overweight in equities. While many sovereign investors are content to remain overweight, some are not comfortable with the status quo. More than a third (35 per cent) plan to reduce equity weightings over the medium term, with the intent overall to make small reductions rather than cut significantly.

As allocations to equities increase, this year’s study has revealed there are significant evolutions in approach. Passive management, and to an extent factor investing [strategy that uses factors that impacts returns such as macro-economics and investment style], have made significant inroads into portfolios. Over the last three years, just under half (45 per cent of sovereign investors undertook some degree of rotation out of active strategies into passive and factor investing, to the point where less than half of equity portfolios are now actively managed.

Private markets

Although equities remain at the core of sovereign investors’ portfolios, the average allocation to alternatives has doubled in the past five years, reaching an all-time high of 20 per cent in 2017, as sovereigns increasingly realise a broader set of benefits being introduced to their portfolios. Real estate and private equity remain the most popular asset classes, however infrastructure has recently gained prominence, especially among the largest sovereign investors. The study found that most regions are showing strong demand for private markets.

Middle Eastern sovereigns are the most targeted in their programmes, with allocations into private credit increasing 44 per cent and infrastructure increasing by 33 per cent. In contrast, for private equity a similar number of sovereign investors are reducing allocations in favour of other forms of private market asset classes as those making new allocation.

“Private markets are favoured by many sovereign investors thanks to the long term and illiquid nature of many asset classes within this market. However, investing in private markets has been a consistent challenge for sovereign investors, and as a result many remain underweight. Good opportunities are seen in infrastructure and in private credit, but respondents are seeing fewer attractive opportunities in private equity because of increased competition for assets and bidding up of prices,” said Kufaishi.

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