Sovereign wealth funds ditch bonds for alternatives

private equitySovereign wealth funds (SWFs) have increased their allocations to alternative investments as they search for higher yielding assets and diversification, a PwC report found.

The consultancy said it expected SWFs to increase their investments in the alternatives sector including private equity, real estate, gold and infrastructure.

Alternatives now make up nearly a quarter of SWF portfolios and the proportion in fixed income has been falling.

The total allocation split, based on 2016 estimates, is:

  • Equities                                44%
  • Fixed income                     30%
  • Alternatives                      23%
  • Other asset classeses     3%

The 30% investment into fixed income instruments such as government bonds has dropped from a peak of 40% in 2013.

PwC said it expects the growth rate of assets under management (AuM) to increase as SWFs invest in non-fossil sources and diversify portfolios to include alternative investments.

The report, called ‘The rising attractiveness of alternative asset classes for sovereign wealth funds’, examined 119 SWFs and found that total AuM was US$7.4 trillion (€5.97 trillion).

PwC predicts interest rate hikes across Europe and the United States would be moderate, encouraging SWFs to continue searching for higher yields by allocating investment to non-traditional areas.

Will Jackson-Moore, PwC’s global head of sovereign investment funds and private equity, said that SWFs played an important role in helping governments stabilise their economies and exchange rates.

He said: “We expect alternatives to be prominent in SWF portfolios in the future as they can offer increased diversification, principal protection, a hedge against inflation, and an increase in portfolio performance.”

But he stressed the importance of finding the right allocation strategy for these asset classes as including certain alternatives might introduce different risks such as illiquidity, complexity, and cyclicality.

He added: “Overall though, the benefits seem to outweigh the costs, as the varied nature of alternatives provides SWFs with the ability to select an asset class specific to their investment needs.”

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