GLOBAL - The world's leading sovereign wealth funds have been forced to reassess their investment strategies and risk management in the wake of turbulent financial markets, research by State Street Global Advisors (SSgA) shows.
The findings, published in a new SSgA paper entitled "Current Issues in Official Sector Asset Management," reveal that as a result, some funds are making significant changes such as shifting from active investment management strategies to passive ones and focussing on emerging-market debt as yields on traditional asset classes fall.
Greater focus is being placed on the possibility of accessing different and independent sources of economic value such as land and infrastructure to help diversify sovereign portfolios, the report said.
John Nugée, senior managing director of SSgA's Official Institutions Group, said: "Official sector asset managers - central banks, governments and sovereign wealth funds - have not been immune to the difficult market conditions.
"Many have re-examined the performance of their funds, lessons they should draw from the market turmoil and the extra defences they need in their approach. In many cases the review confirmed that their guiding principles were correct, but a number have decided to make some important changes."
The report also said given the severe difficulties which many active fund managers endured during the financial crisis, some sovereign funds now prefer using a more diversified set of market betas and are relying less on managers seeking alpha. SSgA said it has seen a significant shift of assets within sovereign portfolios from active to passive strategies over the last 12 months.
One sovereign wealth fund in the Middle East told the report authors: "In the past we used to assume that assets should be managed actively unless a certain asset class or market clearly did not offer opportunities for active managers or reward active management. Now we tend to see this investment decision the other way round. We conclude that assets should by default be managed passively unless evidence is clear that a given asset class has sufficient imperfections that active management is likely to be consistently rewarded."
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