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Emerging markets pull in sovereign investors
23 June 2014
Invesco’s new study reveals that sovereign funds are increasingly attracted to alternatives and markets such as Africa and Latin America. Stephanie Baxter reports
Sovereign investors are increasing their allocations to
emerging markets and alternatives, according to a new study by
The Invesco Global Sovereign Asset Management Study,
which is in its second year, is based on surveys with more than
50 sovereign investors including central banks, sovereign
wealth funds and government pension funds.
Speaking to Global Investor/ISF, Nick Tolchard,
co-chair of Invesco’s Global Sovereign Group and
head of Invesco Middle East, said: "Sovereigns’
improved attitude to taking risk over the past 12 months
coupled with new money they have received by central
governments, has flowed directly into emerging market
investment. This has really started to develop as a
Africa was the standout market in the study, and Latin America
also continued to be a popular emerging market, said Tolchard.
Both markets had the highest numbers for 2014
"That’s clearly not a capitalisation focus. There
we are seeing potential correlation between geopolitical
relationships, for example where a state entity has a bilateral
trade with Latin America. This represents opportunities at a
more tactical level than a deal level."
Such investors are increasingly using strategic asset
allocation when investing in emerging markets and alternatives
rather than tactical asset allocation, the study found. This
method is an investment strategy comprising target allocations
for various asset classes, while a tactical strategy is an
active one where the percentage of assets held in different
categories are rebalanced.
One reason for the increased allocation to emerging markets is
improvement in transparency, said Tolchard.
"Doing business in emerging markets is becoming more
transparent. There is more financial infrastructure and private
equity vehicles that are helping investors to access these
Despite sovereigns’ increasing focus on emerging
markets, Tolchard explained that an underlying preference for
developed markets remains, particularly for sovereign investors
in the West.
"With western sovereigns we’ve seen more of a
focus on risk-based asset allocation, which tends to mean focus
on geopolitical risk, shareholder protection, transparency on
governance in stocks and organisations. This tends to
provide more of a bias towards developed markets perhaps than
there would be in future generation funds in Middle East and
Sovereigns voted the UK as the most attractive market in the
survey and countries with perceived high degree of political
stability went higher up the scale.
"The UK is perceived as easy to invest in but also has the
financial infrastructure to make that possible, which gives
sovereign investors accessibility to the UK relative to other
markets such as the US."
Tolchard said Invesco had noticed a trend where sovereigns are
investing in UK infrastructure, whether that be existing assets
or increasing interest in forthcoming projects.
As with all markets, the UK’s attractiveness could
be bettered or worsened by political events.
"It will be interesting to review UK’s position
over the next 12 months and see how it is ranked in next
Sovereign investors are also increasingly attracted to
alternative investments. The study found that 51% of investors
rose their exposure to real estate in 2013 while 29% increased
new exposure to private equity.
"Stabilisation funds are evolving by moving away from US
treasury investing into a more traditional asset allocation
model, and there are signs they are moving into alternatives
Tolchard also noted the diversity in risk appetite among
"Public pension funds have to focus on matching liabilities but
they do not have to 100% meet those liabilities as central
governments take on some of the responsibility."
Such investors, known as partial liability sovereigns, have
longer time horizons, higher target returns and greater
risk-asset exposure than conventional defined benefit and
defined contribution sovereign funds.
Sovereigns could look to further increase their allocations to
alternatives and emerging markets as 46% of those surveyed
estimated an increase in new funding this year compared to
2013. Invesco said this increase was driven by growing country
surpluses and strong support from government funds.
The study found that despite the vast difference between
sovereign investors, they are increasingly collaborating as
their investment strategies become more complex. Some 70% of
respondents said they conducted benchmarking against their
sovereign funds, a substantial rise from 53% in last
year’s survey. Invesco put this increase down to
more awareness, collaboration and transparency among
Tolchard said that sovereigns are also exchanging ideas,
whereas historically there was little interaction between these
"Sovereign investors are very interested in talking to their
peers with experience of investing in alternatives as they
allocate to more sophisticated and technical asset
He also noted: "It’s a challenge to get the right
skills and talent to deal with more sophisticated investment
strategies, and that will be partly done by hiring people but
also through knowledge exchange with asset managers."