ATLANTA, June 5, 2017 /PRNewswire/ -- Invesco today
released its fifth Invesco Global Sovereign Asset
Management Study*, an annual in-depth report on the
complex investment behavior of sovereign wealth funds and central
banks, which this year shows that geo-political uncertainty and
limited options to increase risk asset allocations are causing
sovereign investors globally to make fewer allocation changes than
at any point in the last five years, despite target return gaps
increasingly widening.
This year's study, conducted face-to-face amongst 97 individual
sovereign investors and central bank reserve managers across the
globe representing $12
trillion** of assets, asked sovereign investors
to rate the importance of various economic and geopolitical factors
on their investment strategies.
Sovereign investors see low interest rates as the greatest
tactical asset allocation factor, driving increasing allocations to
real estate as sovereigns look for alternative sources of income
generation. However, the longer term implications are less certain
with expectations of a gradual return from quantitative easing to
quantitative tightening. Instead Brexit and the US election results
are expected to grow in importance for future allocations (set to
increase in importance by +82% and +68% respectively), as the
implications of political shifts on investment performance becomes
clearer.
Trump on Top
Sovereign investors have ranked the US as
the number one market in terms of attractiveness for the past three
years, and this year the country retains its top spot with a score
of 8.0 (out of ten). The US is also the winner in terms of actual
allocations, with 37% of respondents reporting overweight new flows
to North America in 2016 relative
to their total portfolio - higher than any other region – and a net
40% are planning to overweight further in 2017. This compares to
only 4% who were underweight on new flows in 2016, and 4% who plan
to do the same in 2017 – the rest (59% for 2016 and 56% for 2017)
did not change or plan to change the weighting.
This attractiveness is driven largely by interest rate rises as
well as market confidence of a "pro-business" corporate tax regime
following Trump taking office in January
2017. However, long term confidence is still restricted by
uncertainty around whether Trump will deliver on policy promises,
and positive views on potential infrastructure investments in the
US are hampered by concerns about growing protectionism limiting
access for foreign sovereigns.
Falling allocations to the UK linked to Sterling value;
long-term outlook stable for now
The UK saw the biggest drop
in attractiveness to sovereign investors, down to 5.5% from 7.5%
last year. Brexit is seen as a significant negative for UK
investment, and investment sovereigns*** with European interests
questioned the future of the UK as an "investment hub" for
Europe, given uncertainty over
taxes on imports and market access.
Sovereign investor allocations to the UK were down in 2016; 33%
of respondents reported being underweight on new flows to the UK
(higher than any other region) compared to 13% who reported new
overweight positions to the UK, while the rest (54%) cited no
change. However, when the fall of Sterling is taken into account,
UK allocations remain relatively stable, with stated allocation
declines of 15% likely linked to the corresponding drop by 16% in
the value of the GBP relative to the USD, rather than withdrawals.
Furthermore, the fall in the value of the pound has led to a rally
in UK stocks.
Moving forward, 41% of sovereigns expect to introduce new
underweight positions in 2017, compared to just 5% who are planning
new overweight positions to the UK. The majority (54%), however,
don't intend to make any changes to their allocation weightings as
they wait to assess the likely longer-term impact of
Brexit.
Alex Millar, Head of EMEA
Sovereigns, Middle East and
Africa institutional sales at
Invesco, commented: "Despite the apparent negative
sentiment around the UK, many sovereigns confirmed their long-term
commitment to existing UK investments post-Brexit - especially real
estate and several high-profile UK infrastructure investments,
including Thames Water and Heathrow Airport. These are unlikely to
move until the outlook for the UK as a preferred investment
destination becomes clearer."
Germany is core to
Continental Europe
A fall in sovereign investor allocations
was seen in Continental Europe, from 12.8% of AUM last year to
11.2% this year, as the risk of wider EU disbandment appeared to be
growing. However, Germany stands
out from its European neighbors as one of the most attractive
investment destinations globally for sovereign investors,
increasing from 7% last year to 7.8% this year. Germany's popularity is attributed to its
perceived "safe haven" status and positivity towards Germany has increased based on its economic
strength. Please note, so called safe-haven assets do not imply
risk-free investments.
Real estate offers income generation as new contributions
slow
The return environment has, on the whole, remained
challenging for sovereign investors who have on average
underperformed their target returns by 2%. Over the past 3 years,
governments have responded to poor economic performance by reducing
new funding to sovereigns (on average down from 8% in 2015 to 5% in
2017) and cancelling investments (down from -1% in 2015 to -3% in
2017).
With deployment into real assets overall being challenged by
reducing opportunities in infrastructure and private equity, as
outlined in the 2016 Study, and 71% of sovereign investors
reporting being underweight to infrastructure due to execution
challenges this year, investors are continuing to instead seek
similarly attractive investment outcomes through real estate
investment.
Over two thirds (67%) of sovereigns reported being overweight to
global real estate in 2016, and 46% expect to be overweight this
year. Figures were similarly positive for home market real estate,
with 58% being overweight to this segment relative to their
portfolio in 2016, and 38% expecting to be overweight this
year. Sovereigns on average increased their home market real estate
allocations at a greater rate (increasing by 1.2% of AUM) than they
did their global real estate allocations (increasing by 0.3% of
AUM) year on year.
Sovereigns cited a range of reasons for increasing target real
estate allocations, including the scope to capture liquidity alpha,
the potential to generate income matching mid to long-term
liabilities, and the potential for internalization and control.
Home market real estate was particularly attractive for liability
and investment sovereigns given there is no need to hedge currency
exposure. The increase in home market allocations generally is
mirrored in sovereign appetite for income-generating real estate
assets, matching home currency-denominated liabilities at higher
yields than domestic fixed income. Consequently, the tilt to real
estate in home markets is substantially funded from lower
allocations to fixed income.
Growth in international real estate allocations was mostly
linked to tactical factors such as restrictions in domestic markets
or challenges achieving target allocations in infrastructure or
private equity. Sovereigns favored high grade office and commercial
real estate, since long-term tenancies make these good income
generators, over industrial or residential categories, which offer
asset growth and development potential. They expect office and
commercial to each comprise 40% of total respondent real estate
portfolios in the next three years, while industrial and
residential are expected to make up 16% and 28% of portfolios
respectively.
Alex Millar
commented: "2016 was a challenging year for
sovereign investors with concerns surrounding funding levels and
return expectations remaining front of mind amidst added
macro-economic and political uncertainty. Demand for
alternatives like infrastructure has been a consistent theme in
past years, but this year the challenge of increasingly scarce
supply is compounded. While investors have fewer asset
allocation levers with which to respond, they are delving deeper
into more supply-rich real estate markets, and looking to the US
and Germany for opportunity and
economic strength."
Alex Millar
concluded: "Sovereign investors are a diverse group
and challenges affect sovereigns differently according to their
liabilities, risk appetite, funding dynamics and other factors. Our
study has once again illuminated how these diverse investors are
responding to global trends as they become ever more sophisticated,
yet limited by both external and internal constraints."
Notes to Editors:
The full 2017 Invesco Global
Sovereign Asset Management Study can be found at:
www.igsams.invesco.com.
* This is Invesco's fifth sovereign asset management study. In
2017 we conducted interviews with 97 different sovereign investors
compared to 77 in 2016. The findings have been validated using
'common cohort' analysis of the 48 interviews conducted with the
same firms in the past four years. In this study Invesco defines
sovereign investors as state-owned investors, which includes:
standalone Sovereign Wealth Funds (SWFs), state pension funds,
Central Banks and government ministries.
** Sourced by NMG Consulting: total assets of those sampled
stands at $12.08 trillion as at year
end 2016.
*** The Invesco Global Sovereign
Investor Model bases its segmentation on investment
objectives and outlines four key profiles.
About Invesco Ltd.
Invesco is an independent
investment management firm dedicated to delivering an investment
experience that helps people get more out of life. NYSE: IVZ;
www.invesco.com.
In the United States, the
Invesco Global Sovereign Asset Management Study is intended only
for Institutional Investors. This document is for information
purposes only and is not an offering. It is not intended for and
should not be distributed to, or relied upon by, members of the
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This document is issued in the US by Invesco Advisers, Inc., Two
Peachtree Pointe, 1555 Peachtree Street, NE, Atlanta, GA 30309
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SOURCE Invesco