Does a Reference Portfolio Make Sense for Sovereign Wealth Funds?

Posted on 10/06/2022

Many large sovereign wealth funds are contrarian to a point by nature, especially when it comes to funding sources. When global oil prices go up for a sustained time period, large GCC sovereign wealth funds tend to see inflows of capital.

A number of public funds and sovereign wealth funds have embraced an investment model called a reference portfolio. These institutional investors include New Zealand Superannuation Fund, Singapore’s GIC Private Limited, and the Canada Pension Plan Investment Board.

The reason for a reference portfolio is to benchmark the performance of investor’s actual investment portfolio and the value they are adding through their active investment strategies. Investors like GIC use the reference portfolio to measure its risk appetite.

However, not all sovereign funds embrace a reference portfolio. For example, Australia’s Future Fund does not rely on a reference portfolio with passive exposure to bonds and equities to determine the level of risk. The Future Fund uses a model called “equity equivalent exposure,” which for them is set at 55% to 65% of its investment portfolio. That risk can be expressed through credit, through equities, through infrastructure, through private equity, through listed equities, etc. The Future Fund doesn’t set allocation targets for different asset classes, which fixes the problem of anchoring. Sovereign wealth funds with large balance sheets can be very opportunistic, but at the same time, many rely on the idea that asset allocation has a greater impact on returns and risk versus active security selection.

Get News, People, and Transactions, Delivered to Your Inbox