Sovereign investment portfolios around the world have gone back to holding the largest chunks of their assets in fixed income after concerns about volatility in equities markets, says Invesco.
Globally, sovereign investors increased their fixed income allocations to 33% from 30% in 2018 while cutting equities to 30% from 33%.
This reverses the five-year-long trend during which fixed income allocations at sovereign investors fell as equities posted strong gains.
The results are from Invesco's Global Sovereign Asset Management Study conducted with 130 individual sovereign investors and central bank reserve managers across the globe representing $20.3 trillion of assets. The sample included six respondents from Australia and New Zealand.
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Sovereign investors recorded 4% in returns in 2018, down from 9% the year before as the equity markets fell. Australia's Future Fund delivered 5.8% in the year ending December 31 and trimmed slightly its listed equities holdings.
"Eighty nine percent of sovereigns anticipate the end of the economic cycle within the next two years. This combined with volatility concerns and the prospect of negative returns from equities has led to increased fixed income allocations and more diversification in allocations to infrastructure, real estate and private equity markets," Invesco said in the report.
An earlier report from International Forum of Sovereign Wealth Funds (IFSWF) said that sovereign wealth funds retreated from private markets in 2017 but in 2018, they were back with a bang.
Their focus was on venture and growth capital financing rounds in technology and health companies as the public markets offered up fewer IPO and other opportunities. Australia's $150 billion Future Fund backed a California-based tech startup last month.
APAC sovereign investors buck the trend
Interestingly, Asia Pacific sovereign investors showed a different sentiment than their global peers.
They plan to continue or increase their equities exposures as others retreat. Only 6% of APAC respondents to the survey said they would scale back on stocks in the next 12 months, compared to 22% globally.
"Asia Pacific sovereigns also have been increasing allocation to North America, with all of the region's investors saying that the US has increased in attractiveness over the last two years," the report said.
Investors attracted to China, stay away from Europe
More than 80% of the investors said trade tensions were affecting their decisions to allocate to China.
However, the country's attractiveness as an investment destination recorded the most gains of any other major region since 2017, following China's decision to open up its equities markets to foreign investors through China A-shares and bond markets through Bond Connect.
Renminbi emerged as the most favoured currency for the year ahead with 27% saying they will increase allocations to it over the next 12 months, which Invesco expects to be taken from USD, EUR and GBP.
Nearly one third of sovereign investors decreased allocations to Europe in 2018 and a similar number are planning further decreases in 2019.
"A combination of slowing economic growth and perceptions of rising political risk have led to a decline in the perceived attractiveness of major European economies. Brexit is now influencing asset allocation decisions for 64% of sovereigns, while internal politics in continental Europe are impacting decision for 46% of sovereigns," the report said.
Further, the report said single-factor approaches like those based on value or momentum fell below sovereign expectations, driving a move towards multi-factor approaches.
This is similar to a FTSE Russell study from last month which found multi-factor smart beta approaches were proving to be the most popular with asset managers.
Lastly, 60% of the Invesco study's respondents said they had an ESG policy, up from 46% last year.