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Short-termist sovereign wealth funds miss return targets

According to the report, sovereign wealth funds made average returns of 4.1% in 2016. This is the same number as in 2015 and two percentage points below their average long-term annual return targets.

Funds responding to Invesco’s survey expect to make little wholesale changes to their asset allocation this year, as the unexpected geopolitical developments of 2016 have made them wary of taking strong allocation bets.

Safe haven appeal

In response to political uncertainty, they plan to step up exposure to perceived safe havens such as the US and Germany, while reducing allocation to the UK. The US and Germany are regarded as the most attractive markets, receiving a score of 8 and 7.8 respectively on a 10-point scale. The UK’s score, however, decreased from 7.5 to 5.5. It’s now the least attractive market in Europe to sovereign wealth investors.

The preoccupation of sovereign wealth funds with (short-term) political risk is remarkable, since most of them have an extremely long-term investment horizon.

Surprising is also their preference for the US, which contradicts general market sentiment: recent fund flows as well as Expert Investor asset allocation sentiment data suggest US (equities) are currently deeply unpopular. Some four in 10 survey respondents expect to increase allocation to North America in 2017. This contrasts with more than a third of European fund buyers planning to reduce their exposure to US equities this year.

Higher interest rates in the US are one reason that the country is relatively popular with sovereign wealth investors, as US bonds look comparatively more attractive than equivalents in other developed markets. According to the survey, interest rates are indeed the most important macroeconomic factor driving both tactical and strategic asset allocation.  

Sovereigns without clothes

But survey respondents cite other, less convincing reasons for increasing their exposure to the US. The report cites “confidence of a ‘pro-business’ corporate tax regime following Trump taking office in January 2017”, as well as “growing optimism around the potential for new infrastructure deals in the US following political campaigning suggesting an investment opportunity of $1trn”. Good luck with that, sovereign wealth investors!

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