Third of sovereign funds to cut equity holdings

Investors cite trade war fears, geopolitics and high valuations: Invesco

Over one-third of sovereign investors plan to cut their equity exposure over the next three years after a strong run in 2017, citing trade wars, geopolitics and high valuations as headwinds to performance, a study by asset manager Invesco showed.

The annual report, which is based on interviews with 126 sovereign investors and central bank reserve managers with $17 trillion in assets, found equities had overtaken bonds to become the biggest asset class in portfolios, averaging 33 percent. This is up 29 percent from 2017.

Nearly half of sovereign investors are now incrementally or materially overweight equities, but while 40 percent said they were happy with the status quo, 35 percent plan to reduce their equity exposure over the medium term, Invesco noted.

The interviews were conducted between January and March, a volatile quarter for world stocks.

Some investors believe such stocks remain vulnerable to a correction.

Among the main concerns cited were the possibilities of a trade war, geopolitical risks and the fact that equity valuations are high both on an absolute and relative basis.

Since March, the US has escalated its trade dispute with China and other key trading partners, sending global equities into a tailspin.

Investors are concerned that the imposition of tit-for-tat tariffs will hamper exporting nations and crimp global economic growth.

But Alex Millar, head of EMEA sovereigns at Invesco, noted investors were still keen to get risk into their portfolios to generate returns, saying: “Last year, they were paid to stay in equities.”

Total average returns topped 9.4 percent in 2017, up from 4.1 percent in 2016. But sovereign investors were less optimistic about the outlook for 2018, expecting to make 5.8 percent – undershooting their targeted return of 6.5 percent.

“Equities had a good run last year, but this hasn’t caused investors to change their longterm expectations – they think returns going forward will be tough,” said Millar.

This is partly a function of low interest rates, which have encouraged sovereign investors to build a strategic allocation to alternatives such as private equity, real estate and infrastructure.