Institutions to increase EM exposure, study finds

Survey1Eighty per cent of official institutions, such as sovereign wealth funds, expect to increase their exposure to emerging market securities as they seek

out new markets to chase yield, research shows.

Also, 38% of them see rising interest rates as their biggest investment strategy challenge in the next two years.

State Street sponsored a survey of 62 senior executives at official institutions globally, which includes central banks and public pension reserve funds.

Currency risk also emerged as a significant concern with 51% saying the biggest challenge is correctly measuring and monitoring the amount of currency risk they are taking. This emerged as the biggest concern for Asia Pacific respondents with 44% saying it is a challenge to combine different risk measures across asset classes.

The research also found that institutions with the appropriate mandate expect to increase their exposure to alternative assets such as hedge funds, private equity, real estate and infrastructure. But this move into new asset types is creating new levels of portfolio complexity and within this uncharted territory are fresh challenges, State Street says in its New Horizons for Official Institutions report.

Some of the other key findings from the research include:

  • 73% say keeping up with the changes in regulation across global markets is a challenge
  • 37% are most concerned about emerging market volatility
  • 35% are concerned about the cost of execution going up given collateral issues and additional reporting requirements
  • 25% say their biggest investment challenge is managing the complexity associated with alternative investments
  • Almost 60% plan to increase investment in their risk management systems and processes over the next two years and 32 percent of respondents report difficulties hiring employees with risk, compliance and reporting skills
  • Improving operational efficiency is considered a significant challenge by 47% of official institutions interviewed
  • Meeting the data challenge: 50% say managing data is a challenge. Integrating performance and risk analytics and protecting data security are paramount. In Asia Pacific that statistic rose to 55%.

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