Investors are bolstering their allocation to fixed income as yields remain attractive despite high inflation, according to Invesco’s Global Sovereign Asset Management Study.
Views from 142 chief investment officers, heads of asset classes and senior portfolio strategists fed into the study, with 86% expecting inflation to remain higher in the current decade compared to the last.
Soaring inflation caused both bond and equity markets to plummet in 2022, leading to sovereign wealth funds reporting average losses of 3.5% over the 12 months.
This marked the first year where sovereigns have recorded an average loss since the annual survey began in 2013.
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The study found that fixed income is the asset class sovereign wealth funds are most likely to allocate towards over the next year, with 28% of respondents planning to shift their portfolios towards the asset class.
Meanwhile, 25% are planning to up their infrastructure weighting, with private equity (21%) and listed equities (15%) also receiving significant interest.
Within fixed income, Invesco reported emerging market and high-yield bonds as particularly attractive to sovereign investors.
The report from the US-based asset manager said: “Fixed income is no longer seen as a ‘set and forget’ portfolio for diversification purposes. Respondents are instead adopting a more tactical stance, utilising all available asset classes and believing that significant value can be added to a fixed income portfolio by actively rebalancing across different fixed income segments.”
Emerging markets
By region, India remained the go-to in emerging markets after taking top spot from China in last year’s survey, with 76% of sovereign wealth funds seeing the country as an attractive allocation opportunity.
The report cited institutional strength and stability in leading emerging markets as a key factor in the increased interest in the sector.
Away from India, wealth funds are also eyeing increased allocations to South Korea (56%), Mexico (51%), Brazil (49%), Indonesia (44%) and South Africa (41%).
Almost a third intend to up their weightings to the Asia-Pacific region in the near future, the joint-most popular region alongside North America. Meanwhile, 22% of investors are planning to increase their weighting to Latin America.
Rod Ringrow, head of official institutions at Invesco, said: “Although average returns in 2022 were negative, there was significant variation within these results. The better performers were those that recognised the risks posed by inflated asset prices and were willing to make substantial portfolio changes. The key lesson from 2022 was that sovereigns need to be prepared to demonstrate greater flexibility and responsiveness to market conditions.”
He added: “Challenges notwithstanding, for many sovereigns the global economy remains fundamentally resilient and expected returns across asset classes are higher than in recent years. This year’s data, however, reveal a misalignment between sovereign wealth funds and central banks on interest rate expectations over the next two years.
“Sovereign wealth funds are far more likely to expect real interest rates to trend downward, albeit remaining higher than in the last decade, while central banks are more likely to expect them to trend upward. This further underscores the importance of a watchful and flexible approach.”
Some 83% of respondents cited inflation as a major risk to global growth over the next 12 months, while 72% were concerned over rising geopolitical risk.
Longer term, 66% flagged climate change as a major threat to growth over the next decade.
