GLOBAL - Sovereign wealth funds will refocus on liquidity and re-evaluate the allocations of their combined US$3.2trn in assets, particularly their exposure to risk assets, as they emerge from the global financial crisis, a State Street panel said.
They are also investing more in their domestic markets, in some cases for the first time, in response to government demands.
"Sovereign wealth funds have been stressed simultaneously on several levels," managing director and head of sovereign advisory at State Street Global Markets Andrew Rozanov told reporters at a briefing.
Many were hurt by the drop in commodity prices, a collapse of world trade and a reverse in foreign capital flow. And many have come under scrutiny for the resulting steep drops in assets.
Managing director and head of State Street Global Advisors' official institutions group John Nugée, said: "They have significantly reduced their headline activity in part because of lower oil revenue, but also because of scrutiny from the press." He said as a result, these investors do not have the freedom they once did to take long-term investment positions.
In a vision report about the state of sovereign wealth funds, Rozanov said these factors are coming together "at the worst possible moment."
He wrote: "Many sovereign wealth funds are being asked by their sponsors to help support domestic spending and investment and to help stabilise local banks and financial markets."
These investors have now started to shore up liquidity and put their diversification plans on hold, he said at the briefing. They have also turned to reserve assets like US dollar and US government debt.
According to State Street's analysis, there are 37 sovereign wealth funds with a combined value of $3.2trn in assets. Of these, 13 belong to Asian countries and 10 to the Middle East.
The largest is the Abu Dhabi Investment Authority with an estimated $625bn in assets, while the smallest is Trinidad and Tobago's Heritage and Stabilization Fund with $3bn in assets.
This week's edition of Professional Pensions is out now.
Nearly 60% of UK employers consider defined contribution (DC) master trusts to be the "most suitable" pension fund for their employees, according to research by Buck.
Companies which have tried to dodge their pension duties by changing their identities are being "hunted" by The Pensions Regulator (TPR) in a crackdown on non-compliance with auto-enrolment (AE).
Removing liquidity restrictions would enable DC funds to capitalise on the potentially higher and safer returns that DB schemes have benefitted from, says Patrick Marshall.