Institutional investors and SWFs gradually increased risk exposure as markets rebounded

Institutional investors and sovereign wealth funds (SWF) gradually increased their exposure to risk assets as financial markets rebounded last year, according to new research.

The joint research by State Street Corporation and the International Forum of Sovereign Wealth Funds (IFSWF), a global network of sovereign wealth funds from nearly 40 countries, looked at how the investors performed in their allocation throughout the Covid-19 pandemic.

The research analysed State Street’s dataset of unique indicators and interviews with seven of IFSWF’s largest members. It found that many SWFs and institutional investors have gradually deployed some of their accumulated cash and reduced fixed income positions to add exposure to risk assets, while financial markets rebounded during the pandemic.

Institutional risk sentiment across asset classes has also broadly improved during the period up to March 2021, particularly for foreign exchange, commodity-sensitive assets and equity reallocation decisions.

Previous IFSWF and State Street research published in May 2020 suggested that institutional investor positioning was cautious at the start of 2020, with cash levels at their highest since the 2008-09 financial crisis.

The latest dataset reveals investors have a more positive outlook for 2021, as they have started to redeploy capital and have reached a risk-neutral level across asset classes. SWFs largely achieved this position by increasing allocation to equities, taking advantage of cheaper prices amid 2020’s poor market performance.

Commenting, State Street head of State Street Associates, Europe, Middle East and Africa (EMEA), Neill Clark, said: “Long-term investors have made risk-positive reallocation decisions across asset classes, reducing cash holdings and increasing equity exposure, while also continuing to diversify their portfolios by increasing allocations to private assets.

“Within equities, there was a marked uptick in institutional investor appetite for US listed stocks, however, emerging-market equity allocations were significantly scaled back. The current macroeconomic environment, anticipated fiscal stimulus and portfolio positioning of institutional investors and sovereign wealth funds present reasons to be optimistic as we move further into 2021.”

In addition, the research found no evidence of asset bubble behaviour. State Street and MKT MediaStats’ proprietary daily analysis of media intensity, interestingly revealed that while discussions of asset bubbles remain topical and indicates heightened concern in the media, there is no evidence equity markets are currently in bubble territory. In fact, there is further room for institutional investors to add to positions in risk assets, State Street said.

“During the pandemic, SWFs have leveraged their long-term investment horizons to take advantage of market dislocations,” IFSWF chief executive, Duncan Bonfield, said.

“This research also reveals that sovereign wealth funds continue to seek investment opportunities in sectors, such as technology and healthcare, that have performed strongly during the pandemic, particularly in private markets, where return profiles align with their multi-year investment approaches. This behaviour underlines their institutional discipline and focus on long-term returns.”

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