Sovereign wealth funds are slowly putting their $4trn to work in new asset classes, as Emma Cusworth reports
Last year GPFG was mandated to include real estate for the first time, targeting a 5% exposure. “The fund’s fixed income allocation has reduced accordingly to 35%,” said Øystein Sjolie, spokesman at Norges Bank, which manages the fund’s assets.
“The fund targets a 4% real return on average,” he continued. “To achieve that, the asset allocation was switched four years ago. Equity increased from 40% to 60% and fixed income reduced accordingly. The competency to handle risk in the organisation has developed, as has the risk tolerance of the owners, who held firm to the strategy during the financial crisis. This has paid off, with good results in 2009 and 2010.”
To reach its 5% real estate target, GPFG will invest around $25bn, focussing initially in Europe, predominantly the UK, Germany and France.
“The fund has a long-term investment horizon,” Sjolie explained. “Assuming efficient markets, real estate is expected to provide an illiquidity premium. As the fund has no short-term liabilities, it is very logical to harvest this premium. Norges Bank has advised the Ministry of Finance to consider other asset classes, such as infrastructure, where the same arguments apply.”
Illiquid alternatives are big beneficiaries of SWFs’ diversification. The proportion of wealth funds invested in real estate increased by five percentage points to 56% over the year; private equity moved to 59% from 55%.
But infrastructure saw the biggest gains with 61% saying they now invest in infrastructure, up from 47%. An increase in SWF allocations would significantly boost this relatively new asset class, helping to attract other institutional assets.
The number of funds investing in fixed income fell three percentage points to 76% between 2010 and 2011 (See chart 1). This is also a natural process for a relatively young sector; 67% of SWFs were created since 2000.
As Preqin’s managing editor Sam Meakin explained: “SWFs, with their long-term outlook and no liabilities, are well suited to illiquid alternatives like infrastructure assets and would have a stabilising influence on the asset class and increase comfort among others.”
Top SWF expansion
The world’s largest SWF, the $625bn Abu Dhabi Investment Authority (ADIA), which acquired a 15% stake in Gatwick in 2010, is planning to increase exposure to infrastructure in North America, Europe, the Far East and Australia focusing on long-term assets like airports, roads and power stations. ADIA is targeting a 5% infrastructure allocation, representing around $31bn.
The $14.8bn Alberta Heritage Savings Trust Fund will continue its current strategy of direct global infrastructure investment to commit an additional $597m, doubling its allocation to 8%.
“It is not surprising those without significant exposure to infrastructure are looking to increase allocations,” said Martin Lennon, head of Infracapital, M&G’s infrastructure investment arm. “It is potentially a very good time with lots of opportunities coming up.”
