Middle East sovereigns, the most committed users of active management, continue to show growing interest in equities and private credit
A growing number of sovereign wealth investors around the world are of the opinion that geopolitical or economic cycles mean markets are at risk of a correction.
As a result, more than a third plan to reduce their exposure to equities over the medium term. But not the majority of investors in the Middle East.
Those findings come from this year’s study of global sovereign asset management according to investment managers Invesco.
For 2018, the report comprises individual interviews with 126 sovereign investors including standalone sovereign wealth funds (SWFs), state pension funds, central bank reserve managers and government ministries that handle a combined $17 trillion in assets – roughly three quarters of the GDP of the world’s five biggest economies minus the United States.
Portfolio allocations to equities globally increased to 33 percent from 29 percent in 2017, driven by a number of factors including the global equity bull market.
A significant portion of that increase came from the Middle East, where roughly 33 percent of investors increased their allocations toward equity investments compared to 11 percent that reduced their stakes – even as 35 percent of global investors plan to reduce their allocations to the class fearing headwinds including the possibility of a trade war and inflation.
Middle East sovereigns, however, are also the most committed contingent of investors dedicated to actively managed portfolios that could allow for a swift escape if things were to head south for the global economy.
Actively managed portfolios are those in which regular and frequent decisions are made on which assets to buy or sell – contrasting with passively managed portfolios which typically track an index, or factor based investing which tracks stocks and bonds for value and momentum.
Actively managed Middle East sovereign portfolios carry a significant cost implication, often up to a whole percent over LIBOR (london interbank operating rate).
However, Middle East sovereign investors “also often pursue opportunistic strategies in less traditional, less efficient markets where active management can potentially deliver significant returns over [the benchmark]… which means that the cost implication of higher use of active strategies is muted,” the report reads.
Globally, sovereign investors saw returns of 9.4 percent in 2017 thanks to equity bull markets, up from 4.1% in 2016. On average, equity returns were 8.7% amongst respondents.
Compared with investors from other regions, Middle East investors are also among the most focused toward infrastructure and private credit investments which favour lending to individual companies and borrowers as opposed to loans on the open market.
Allocations into private credit from the region increased 44 percent and infrastructure increased by 33 percent from 2017.