The past couple of years of market turbulence have resulted in a growing shift from active investment management strategies to passive ones and an increasing focus on the emerging-market sovereign debt as yields on traditional asset classes have fallen, according to State Street Global Advisors (SSgA).
At the same time, there is greater interest in accessing alternative sources of economic value, such as land and infrastructure to help diversify portfolios.
“Official sector asset managers—central banks, governments and sovereign wealth funds—have not been immune to the difficult market conditions,” says John Nugée, senior managing director of SSgA’s official institutions group. “Many have re-examined the performance of their funds, lessons they should draw from the market turmoil and the extra defenses they need in their approach. In many cases the review confirmed that their guiding principles were correct, but a number have decided to make some important changes.”
Risk management and value add
According to SSgA,, some of the more sophisticated sovereign funds are looking to identify and access new sources of economic added-value in order to provide better diversification for their portfolios. A debate within the sector is growing around diversification, with possible sources including land, infrastructure and even art. However, a lot of work is still required in order to refine this strategy into a quantifiable theory that can be used to build diverse portfolios.
In addition to this diversification strategy, there is renewed interest in protecting sovereign funds against extreme losses, with a possible role for ‘tail’ or ‘disaster’ insurance. Increasingly, sovereign funds are realising that insurance against loss is not a viable option.
“When losses occur, questions are not only asked about the scale of these, but also how they happened,” says Nugée. “The last few years have shaken many previously firmly held convictions and beliefs of sovereign asset holders about the markets, investment theory and the correct way to manage asset portfolios. However, despite this re-examination, they still look well placed to continue to develop and prosper.”
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