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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.

SWFI First Read, September 21, 2018

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U.S. Public Becomes More Aware that Gmail Scans Emails

Alphabet is a major stock holding for sovereign wealth funds and large pensions. Search giant Google is under fire for allowing third-party partners and companies, like Return Path Inc and other advertisers, to share data from Gmail accounts. Many experts and tech observers already knew this, but more people in the public are becoming aware of Google’s practices when it comes to privacy. Google disclosed in a letter to U.S. lawmakers this finding. The Wall Street Journal reported that in some instances, app companies were able to read people’s emails in order to improve their algorithms. In 2017, Google said they would stop scanning all of one’s Gmail messages for the goal of personalized ads.

GPIF Infrastructure Exposure Almost Reached 200 Billion Yen in March 2018

Japan Government Pension Investment Fund’s (GPIF) exposure to infrastructure real estate was 196.8 billion JPY at the end of March 2018. At that period, 57% of the exposure was to the UK, 15% was to Australia, 15% to Sweden, 10% to Spain and 3% to Finland. 21% of GPIF’s infrastructure portfolio was linked to airports versus 27% to ports.

AIMCo-backed sPower Closes $498.7 Million Bond Deal

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Iceland Contemplates a Sovereign Wealth Fund

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The Government of Iceland is looking to possibly form a sovereign wealth fund to stabilize the country from unforeseen shocks to the national economy. The Iceland government released a statement saying, “The state’s contributions to the Fund will be equivalent to new revenues from publicly owned power production companies which are expected to accrue in the coming years.”

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CBRE Global Wins First GPIF Global Real Estate Mandate

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Japan Government Pension Investment Fund (GPIF) awarded its first global real estate mandate by hiring CBRE Global Investment Partners Limited. This is a global core real estate fund-of-funds separate account. Overseeing this mandate as a gatekeeper is Asset Management One Co., Ltd., which is a unit of Mizuho Financial Group. This RFP was launched in April 2017.

CBRE Global Investment Partners is the multi-manager arm of CBRE Global Investors.

In addition, on August 8, 2018, GPIF hired two custodians for short-term investments. These custodians are Trust & Custody Services Bank, Ltd and The Master Trust Bank of Japan, Ltd.

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