Global Official Institutions Are Becoming More Agile in the Face of Economic Uncertainty
April 07 2016 - 10:16AM
Business Wire
New Research from State Street Shows Official Institutions are
Focusing on Risk Management, Governance, Technology and Talent as
They Diversify Their Investment Portfolios
Faced with a challenging investment environment, official
institutions globally are adapting their investment and operating
models to be more agile, according to the latest research report
titled, “Official Institutions: Transforming to Meet the Needs of a
New World,” by State Street Corporation (NYSE:STT).
The global survey of more than 100 official institutions,
defined as central banks, sovereign wealth funds (SWFs) and
government pensions, highlights the challenges stemming from an
uncertain investment climate. Seventy-seven percent of surveyed
central banks are most impacted by potentially rising interest
rates, while 90 percent of SWF and government pension fund
respondents say an equity market correction will have a moderate or
significant impact on their investment strategy over the next three
years.
As uncertainty persists, official institutions are diversifying
their portfolios, and looking at new asset classes and markets. In
particular, SWFs and government pension funds are showing strong
appetite for alternative investments, with 68 percent of the
surveyed SWFs looking to increase allocation to commodities, and 88
percent of surveyed government pensions to real estate in the next
three years, in the hope of achieving returns that beat equity
markets.
Despite the weakened outlook for growth in China, Asia remains
the most attractive region for investment with 89 percent of
Asia-Pacific (APAC) institutions and 63 percent of institutions
from other regions planning to increase their investments
there.
Diversification Requires New Ways to Manage Risk
“A volatile investment environment calls for organizational
agility and official institutions are learning to adapt and become
more agile,” said Kevin Wong, senior managing director and head of
Sector Solutions for State Street’s Global Services and Global
Markets business in Asia Pacific. “They demand strong, flexible
investment teams supported by a nimble operating model that help
them identify opportunities, manage risk exposure, and take
corrective action.” In recognition of the need to respond quickly
to opportunities and threats as they arise, official institutions
globally have embarked on a journey to build a number of adaptive
skills into their organizational DNA:
- Upgrade risk management
approaches — Over half (58 percent) of the institutions
surveyed have changed their risk management approach over the last
three years, and two-thirds of all respondents are planning to make
changes over the next three. SWFs in particular have expanded the
use of risk factor analysis over the last three years (82 percent
vs. 69 percent of central banks), along with the use of derivatives
(64 percent vs. 33 percent of central banks). Seventy four percent
of institutions in APAC say they are most likely to improve their
risk management over the next three years, followed by 61 percent
in EMEA and 56 percent in North and Latin America. In APAC, 74
percent of surveyed official institutions plan to increase their
use of currency hedging strategies (vs. 53 percent in North America
and 52 percent in EMEA).
- Improve governance structure and
transparency — Both central banks and SWFs are beginning to
disclose more data about their investment priorities, risks, and
holdings. About half (52 percent) of all institutions expect to
increase the amount of data they disclose publicly and the
frequency of their reporting (53 percent), while 75 percent view
increased reporting and communication as a way of conveying the
value they generate to their stakeholders and wider public.
- Invest in information
capabilities — Effective technology is critical in helping
official institutions achieve their objectives. Still, many
official institutions struggle with ineffective systems where more
than two-thirds (71 percent) say that integrating legacy systems is
a common problem, and only 16 percent believe their institution is
very effective at sharing data internally. Cybersecurity, data
warehousing and integrating performance and risk analytics are
cited as particular priorities. More than two-thirds (69 percent)
of central banks and 78 percent of other institutions are investing
in upgrading their cybersecurity over the next year.
- Develop the right talent —
Official institutions are examining cost-effective ways to invest,
such as building their own in-house resources or seeking different
relationships with external fund managers. They demonstrate strong
intentions to hire in key areas — investment (70 percent),
technology (61 percent) and risk and compliance (60%).
“The extent to which SWFs and central banks are changing their
approaches is sure to differ as a result of their different
mandates, objectives, and circumstances,” added Wong. “Above all,
they must be able to adapt to the unpredictable market environment
to ensure long-term success.”
To read the full report, please click here.
About the Research
On behalf of State Street, Oxford Economics, a global research
firm, conducted a survey of official institutions during September
and October 2015. The survey captured 102 responses from senior
executives around the world. Of these, 52 came from central banks
and the remaining 50 from sovereign wealth funds (SWFs) and public
pension reserve funds.
About State Street Corporation
State Street Corporation (NYSE: STT) is one of the world's
leading providers of financial services to institutional investors,
including investment servicing, investment management and
investment research and trading. With $28 trillion in assets under
custody and administration and $2 trillion* in assets under
management as of December 31, 2015, State Street operates in more
than 100 geographic markets worldwide, including the US, Canada,
Europe, the Middle East and Asia. For more information, visit State
Street’s website at www.statestreet.com.
* Assets under management include approximately $22 billion as
of December 31, 2015, for which State Street Global Markets, LLC,
an affiliate of SSGA, serves as the distribution agent.
Investing involves risk including the risk of loss of
principal.
All information has been obtained from sources believed to be
reliable, but its accuracy is not guaranteed. There is no
representation or warranty as to the current accuracy, reliability
or completeness of, nor liability for, decisions based on such
information and it should not be relied on as such.
Diversification does not ensure a profit or guarantee against
loss.
© 2016 State Street Corporation - All Rights Reserved
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State Street CorporationJulie Kane,
1-617-664-3001jekane@statestreet.com@StateStreet
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