Like many investment managers, sovereign wealth investors are seeking safe harbors amid a low-return environment.
Atlanta-based Invesco found that sovereign investors, those who manage state-owned assets, have developed a taste for U.S. investments and an interest in alternatives in the first half of 2016 after the low-return environment made many miss their target returns.
In its fourth annual “Invesco Global Sovereign Asset Management Study,” the firm found that sovereign investor confidence has remained stable amid 2016’s early market volatility as well as during the steep drop and then slow restoration of oil prices.
Low or negative interest rates globally contributed to declining returns, according to Invesco, whose respondents reported average annual returns declining. The returns had been 6.6 percent across the past five years but fell to 4.1 percent in 2015, a 1.8 percent gap from the average sovereign investor target of 5.9 percent.
Sovereign investors in the west have remained more confident than their peers, and the confidence in sovereigns continues as they have continued to receive additional funding, says Invesco. While some high-profile withdrawals have occurred from major investment sovereigns, the average new funding is 7 percent of assets, while only 3 percent of assets on average have been withdrawn or cancelled.
Defined benefit pension funds in emerging markets are the most significant contributors to the growth of sovereign funds, according to Invesco.
New capital is flowing into the U.S. and "frontier markets" and away from the BRIC countries of Brazil, Russia and China. While allocations to Russia and China have declined over the past year, a greater portion of sovereign portfolios is now being invested in emerging Asia and Africa, according to Invesco.
Invesco attributed the movement in capital to the divergence of emerging market economies—while some emerging markets have seen growth slowed, stalled or reversed because of political instability, demographic pressures or high correlations to stagnant developed economies, others have continued to display high growth rates.
While U.S. markets have also slowed, they still offer more attractive rates of return than many other regions, says Invesco. This year, the U.S. is the most popular target for sovereign investors, posting its highest level of attractiveness to them since the global financial crisis. On a scale of 1 to 10, with 10 being the most attractive, they rated the U.S. an 8.5, compared with 7.5 for the U.K., 7.0 for overall developed markets and 5.2 for emerging markets.
Real estate has become the primary target for increasing U.S. sovereign allocations, growing faster than other alternatives like private equity and infrastructure, which sovereign managers say are difficult to source, according to the survey.