SOFAZ Testing Waters in Asset Diversification

azerbaijanmapThe US$ 34.1 billion State Oil Fund of Azerbaijan (SOFAZ) embarked on a path to diversify asset holdings. From 2011 to 2012, SOFAZ’s assets grew by 14.5%. The Central Asian sovereign fund expanded their investment policy to permit investments in gold bullion and institutional real estate. Up to 5% of SOFAZ’s assets can be allocated to gold. With regard to institutional real estate, SOFAZ made a number of property transactions in major European cities. Some notable purchases include 78 St. James Street in London and the Actor Gallery in Moscow.

Investment policy is approved on an annual basis by the President of the Republic of Azerbaijan.

Granted allocation to fixed income allotted to 94.36%, inroads were made in gold, equities and real estate investments. Investment policy for SOFAZ remains restricted to having 85% of the portfolio in fixed income. This minimum fixed income allocation did not permit SOFAZ to capture the rising stock market gains in late 2012 in which many other sovereign funds were able to capture. On the other hand, returns for SOFAZ year after year have been positive and less volatile.

Currency diversification included the Turkish lira, Australian dollar and Russian ruble. To boost returns in fixed income, SOFAZ has increased bond holdings in emerging market debt. Emerging market debt increased to 14% in 2012.

SOFAZ Investment Portfolio by Asset Class

Asset Class Weight
Fixed Income 94.36%
Gold 2.35%
Equities 2%
Real Estate 1.29%

Source: State Oil Fund of Azerbaijan Annual Report – Data from 12/31/2012

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