Investment behavior of Sovereign Wealth Funds revealed

  • 6% of GCC SWF assets are focused on local development investments
  • 88% of GCC SWF assets are invested internationally for diversification purposes
  • 5% of GCC SWF assets are invested internationally to drive foreign or local policy outcomes

Invesco Asset Management Limited today released its second annual Invesco Middle East Asset Management Study* which offers insight into the complex investment behaviour of sovereign wealth funds (SWFs) in the Gulf Cooperation Council (GCC) region and provides a new framework to help interpret investment preferences across these ever-evolving markets. The new model helps dispel the myth about the prevalence of international ‘trophy asset’ investing, and suggests geo-political drivers could be drawing money flows towards local development. Invesco opened its Dubai office in 2005, and has been working with GCC clients for decades, offering financial institutions and investment professionals access to global investment expertise.

The ‘Invesco Sovereign Wealth Fund Model’ acknowledges that no one SWF is the same, and different objectives and environmental factors are behind investment preferences. Currently SWFs across the GCC account for 44 per cent** of global SWF flows, representing just over $1 trillion. By seeking a better understanding of this important investment group, Invesco believes the model could be developed further to help track the evolution of SWFs globally as well.

The study reveals that contrary to the widely held view that the majority of SWF assets in the GCC region put money into what is termed ‘policy supporting’ investments; either trophy assets to build the profile of a region or investments to support foreign policy, this accounts for approximately just 5% of SWF assets illustrating a recent shift to more locally focused investments and balanced equity investment.

The Invesco Sovereign Wealth Fund Model bases its segmentation on SWF investment objectives and outlines four key categories:

  • ‘Development Agencies’: SWFs focused on local development projects and investments – 6% of GCC SWF assets
  • ‘Policy Supporters’: SWFs that use international investments to drive foreign or local policy outcomes – 5% of GCC SWF assets
  • ‘Diversification Vehicles’: SWFs that invest internationally to diversify and preserve wealth for future generations, typically referencing a global benchmark for asset and geographic allocations – 88% of GCC SWF assets
  • ‘Asset Managers’: SWFs that are purely focused on risk-adjusted investment returns, typically with broad scope to invest across assets and regions – 1% of GCC SWF assets

Nick Tolchard, Head of Invesco Middle East commented: “Interestingly 88% of sovereign wealth fund assets are invested for diversification purposes, putting assets in what we would term relatively straight forward balanced, long term funds. In the main the objective is to diversify country assets away from oil dependence, preserving wealth for future generations. The ‘public’ perception of sovereign wealth funds is that they invest heavily in international trophy assets, this shows that it simply isn’t the case with only approximately 5% of SWF assets now going that way.

“Looking at the investment behaviours of SWFs we can see in the main they tend to separate into focused units over time rather than shifting from one to another. In most cases it is too simplistic to suggest that a whole sovereign wealth fund changes its entire investment objective.”

The analysis behind the Invesco Sovereign Wealth Fund Model also demonstrates that more money is shifting locally in the wake of unrest in the region. Nick Tolchard added “The current uprisings in Egypt and other Arab countries have driven greater local and regional allocations by some state entities which could justify short-term reclassifications from ‘Diversification Vehicles’ to ‘Development Agencies’. On the surface this would seem to make sense as a means to placate rising unrest, but in some markets such as Qatar there are possible local inflationary pressures to consider as the local pool of capital increases – though will not be the case everywhere.”

Traditional investment SWFs move towards developed market investments

Interestingly traditional investment SWFs – diversification vehicles and asset managers – appear to be showing a greater shift in their asset allocation towards developed markets. In our 2010 study 64% of traditional investment, SWFs showed a preference for emerging markets, in contrast to just 25% of SWFs and sovereign agencies in 2011. For an average SWF portfolio, Invesco estimates that 54% of GCC SWF assets are now held in developed market investments with the highest exposures to North America (29%) and to Western Europe (19%).

Nick Tolchard commented: “Last year’s study identified a consistently high demand for emerging markets across SWFs and all other companies and territories. We are now identifying a growing trend towards more developed markets, as investors seek new and possibly more fruitful investment opportunities in undervalued developed markets. However, an important nuance is that it is a case of there being more money on the table to invest in developed markets, rather than investors moving out of emerging markets. Investors are in fact becoming more discerning over their emerging market investments and taking a more sophisticated approach. We are seeing many looking for specific emerging market opportunities such as Turkey and India, rather than broad-based investment in BRIC or global emerging markets.”

Nick Tolchard concluded: “In commissioning this independent study we have sought to focus on the trends driving end-investor behaviours across the major market segments. The GCC is increasingly important and rapidly evolving, and the study forms part of our strategic commitment to understanding the perspective of investors as well as the investment and savings culture of the region.”


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