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Sovereign wealth funds escape large-scale liquidations

3D rendering of an compass with the word resilience

Despite wide speculation, sovereign wealth funds have not needed to provide liquidity to governments, according to Duncan Bonfield, chief executive of the International Forum of Sovereign Wealth Funds (IFSWF).

“Instead, they’ve been able to use their cash position to satisfy private-equity managers’ capital calls and invest in the long-term interests of their owners at a time of great uncertainty,” he said.

The IFSWF is a voluntary organisation of more than 30 sovereign wealth funds in the world and seeks to strengthen its community through collaboration.

Bonfield commented on research findings, which were based on interviews with 10 IFSWF members and an analysis by State Street Global Markets.

The research and institutional brokerage arm of the US financial services company State Street analysed a dataset of the funds that captures aggregated capital flows, portfolio positions and behaviour across multiple asset classes, sectors and countries.

It revealed that many sovereign wealth funds and institutional investors were already either overweight cash or underweight equities prior to March 2020 – before widespread lockdowns on economies were implemented.

Risk affine tendency

The resilience that the funds’ portfolios enjoyed, however, was not a result of investors’ risk averse behaviour, the research said.

On the contrary, more recently, the funds selectively took on risk within equities (eg emerging market stocks relative to developed market stocks) and fixed income (eg two-year Treasuries relative to 10-year Treasuries).

Most of the funds surveyed said that they pursued a disciplined strategy of selling fixed-income securities to purchase equities and maintain their allocation targets to that asset class, but varied in how they executed this strategy.

Neill Clark, head of State Street Associates Emea at State Street, said that the long-term investors maintained institutional discipline during the market volatility observed in March and April 2020.

“We did not observe such widespread risk aversion during this period relative to previous crises and signs suggest there has been a stabilisation in aggregate capital flows observed across asset classes during April,” Clark noted.

And rather than tapping their rainyday funds, several governments from oil-rich nations have recently borrowed from the international bond markets to cover budget shortfalls.

The overall observed trend for sovereign wealth funds as a group, and greatly accelerated since 2008, is a systematic expansion of the risk budget and increased exposure to illiquid investments with a longer-time horizon, the report noted.

Elena Johansson

Senior Reporter

Part of the Bonhill Group.