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SWFs and Pensions Plan to Increase Allocation to Smart Beta, Cash, and Private Infrastructure

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According to the quarterly SWFI Global Asset Owner Survey conducted in August 2018, sovereign funds, endowments, and pensions see trade wars and increased protectionism as the biggest tail risk. In addition, the trade war response was the largest response in the last two surveys, showing that sovereign funds and pensions are very concerned about how trade deals will identify winners and losers in the coming months. This survey had the most responses as of any survey. This makes sense as the sample of our survey questionnaires are invested in a myriad of countries that could be big losers (or winners) in the outcome of future trade deals that are reshaping landscapes.

Other tail risks that emerged as secondary concerns from the question include the emerging market debt crisis and China’s shadow banking system.

The quarterly survey targets sovereign funds, pensions, endowments, superannuation funds, foundations, government funds, and other asset owners. Totaled estimated survey sample size was over US$ 1.8 trillion of assets under management.

Subscribers: TO ACCESS the SURVEY, please go to SWFI.COM, or respondents can contact SWFI.

Smart Beta, Cash and Private Infrastructure

According to the responses, sovereign funds and pensions plan to increase allocation to smart beta products, cash, and private infrastructure in the next twelve months. Passive U.S. equities is a big loser in which many are underweighting. There is a preference of active U.S. equities over passive U.S. equities in terms of allocation. In early September, e-commerce giant Amazon passed US$ 1 trillion in market capitalization. Some media pundits are calling it a phoenix from its previous state as a unicorn. Sovereign funds have shown through SWFI’s transaction database a preference for technology companies like Amazon, Alphabet, and Facebook, despite the survey showing that technology companies are in a bubble.

The likability of hedge funds also increased surprisingly. The increase in a cash preference signals institutional investors taking equity gains and waiting for distressed opportunities. Private infrastructure is bubbling hot too. For example, recently I Squared Capital, an infrastructure-focused private equity firm founded by former Morgan Stanley executives, raised US$ 7 billion for its ISQ Global Infrastructure Fund II.

According to Michael Maduell, president of SWFI, “Chief investment officers are growing anxious as each month passes historical norms. How do we position ourselves for the next downturn and what will be the catalyst? At the same time, many portfolio managers see room for markets to expand; however, security selection will play a larger role for alpha-seeking, sophisticated investors.”

Fixing up Balance Sheets

In a stark change, more sovereign funds and pensions want listed companies to improve their balance sheet structures (repaying debt and pension solvency), versus increasing capital spending. Capital spending was a key popular choice in every survey except for this one. Pension CIOs see a rising interest rate environment, and healthy balance sheets will be even more important.

Risks Toward Financial Market Stability

The asset owners see geopolitical risk as the largest risk towards financial stability, similar to the June survey answer, but more people also saw business cycle risk as a major concern compared to previous surveys.

More About the Global Asset Owner Survey

This is SWFI’s fifth quarterly survey for asset owners. To participate in the next quarterly survey, CONTACT research@swfinstitute.org.

Trump’s First Year Cements M&A Boom, Will it Last?

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Despite a recent downdraft in the stock market, economic signs suggest that the nation has prospered since U.S. President Donald Trump was elected. His first year was marked by mega mergers and acquisitions, and renewed hopes for deregulation and tax relief. M&A deals totaled US$ 1.2 trillion in the year since Trump was elected in a stunning upset, which compelled former U.S. Secretary of State Hillary Clinton to pen the book, “What Happened.” The total number of deals also set a record. In sum, nearly 13,000 deals have been made between the election and the end of the 2017 calendar year. Business sentiment was clearly buoyed by Trump’s election, with investors and organizations cheering the business-friendly environment to come. Unemployment dropped to a low of 4.1% in 2017, before further falling to 3.7% in 2018. This has been described as “full employment.” The unemployment rate will only fall to a certain level because there are always employees looking for something new and leaving jobs they hold. The stock market has also done well under Trump. Not since the 1960’s was volatility as low as it was during the early part of his presidency. Even with the swoon over the last several weeks, the market is still up substantially since Trump’s election. Despite consistent pessimistic headlines on major financial news sites, Amazon is still moving ahead with its massive #2 headquarters, while Google is planning a gigantic development in his core home of Mountain View, California.

Yet, controversy swirls as former U.S. President Barack Obama declared, “When you hear how great the economy is doing right now, let’s just remember when this recovery started.” [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Ayatollah Khamenei Orders Central Bank Governor to Increase Value of the Rial

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Iran Supreme Leader Ayatollah Ali Hosseini Khamenei requested the Central Bank of Iran to boost the value of the Iranian rial, according to the central bank’s governor. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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SWFI First Read, December 8, 2018

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UBS Trumbull Property Fund Faces Redemption, MassPRIM Benefits

Massachusetts Pension Reserves Investment Management Board (Mass PRIM) Allianz Real Estate, and Beacon Capital Partners acquired the Exchange Place skyscraper in Boston has been sold for US$ 845 million from UBS Realty Investors. UBS Realty, part of UBS Group AG, acquired the 53 State Street office tower in December 2011 from Brookfield Office Properties for US$ 610 million. Tenants of the property include Morgan Stanley, The Boston Globe, Hill Holliday, and Nixon Peabody. The property was a major holding of the open-ended fund called UBS Trumbull Property Fund.

MassPRIM will own 49% of the property.

Tower Hamlets Pension Fund Awards Equity Protection Mandate to Schroders

In September 2018, Tower Hamlets Pension Fund awarded Schroders with a mandate for a risk management solution for £700 million in an equity protection strategy. This covers about half of the fund’s portfolio of £1.4 billion. The pension fund’s consultant is Mercer.

Ebola Spreads in the Congo

The second-largest Ebola outbreak in world history has spread to Butembo, a city in eastern Congo with more than 1 million inhabitants.

NZSF Board Member Joins Board of NZX

The NZX (New Zealand Stock Exchange) board of directors named Lindsay Wright as lead independent director. She is Deputy Chair of the Board of the Guardians of the New Zealand Superannuation Fund.

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