Sovereign Wealth Funds (SWFs) are increasingly investing in alternatives alternative investments such as private equity, real estate, gold and infrastructure to park their funds, according to a new report by PwC.
They allocated nearly a quarter (23%) of their assets under management to alternative investments, the report says.
SWF’s total assets under management grew to $7.4 trillion in 2016 despite them facing unfavourable conditions since 2014 when asset growth began to stall as a result of falling oil prices.
The report says that SWFs broadened their investment strategies after the pressure felt since 2014.
PwC noted that it expects the growth rate of assets under management to increase in the coming years as “SWFs invest in non-fossil sources and diversify their portfolios to include alternative investments to enhance returns”.
From a peak of 40% in 2013, SWF’s investment into fixed income instruments such as government bonds has declined to 30% in 2016.
The report noted that including certain alternative asset classes is not without risks as the majority of alternatives are highly illiquid.
“An exception is gold, which has one of the highest rates of daily volumes exchanged and can provide protection against short and medium term market corrections,” the report read.
PwC global head of sovereign investment funds and private equity Will Jackson-Moore commented: “We expect alternatives to be prominent in SWF portfolios in the future as they can offer increased diversification, principal protection, a hedge against inflation, and an increase in portfolio performance.
“That being said, finding the right allocation strategy for these asset classes is crucial as including certain alternatives might introduce a new set of risks such as illiquidity, complexity, and cyclicality. SWFs should keep in mind the need for continuous monitoring of their portfolios and their investments and reallocate their capital to reflect economic developments.
“Overall though, the benefits seem to outweigh the costs, as the varied nature of alternatives provides SWFs with the ability to select an asset class specific to their investment needs.”