Sovereign wealth funds continue to invest in alternative assets in the UK
Brexit has failed to deter SWFs from investing in alternative assets in the UK
Even as brexit is having a generally adverse effect across industrial sectors, sovereign wealth funds continue their venture into alternative assets in the UK.
These funds are ploughing an increasing amount of cash into alterative assets, says a new report by PwC. It found that SWFs, the largest of which is Norway’s £772bn government pension fund, are now allocating 23 per cent of their assets to areas such as private equity, real estate, gold and infrastructure. The report says that following fall in oil prices and lower yields on government bonds reducing fixed income, sovereign wealth funds have been forced to diversify. Their allocation to fixed income has dropped from a peak of 40 per cent in 2013 to 30 per cent in 2016.
PwC’s global head of sovereign investment funds and private equity, Will Jackson-Moore said that it expects alternatives to be prominent in SWF portfolios in the future as they can offer increased diversification, principal protection, a hedge against inflation, and an increase in portfolio performance. He added that finding the right allocation strategy for these asset classes is crucial as including certain alternatives might introduce a new set of risks such as illiquidity, complexity, and cyclicality.
The report noted that despite Brexit, there has been ongoing sovereign commitment to long-term alternative investments in the UK. Some of the notable investments into the UK by SWFs include those in Thames Water and Heathrow Airport. Equities, which have also been a SWF stalwart, have seen fairly sustained popularity as allocation remained at 44 per cent last year. But private equity, where sovereign wealth funds will invest in non-listed companies for a longer period, has become one of the hottest alternative classes as SWFs dedicated $45bn to the strategy in 2016.
The PwC report said that the asset class performed well in recent years, with returns of 13.6 per cent over the five-year period. But in terms of number of SWFs, most allocations were for the real estate and infrastructure sectors. Though interest rates are likely to rise soon in Europe and the US, PwC predicts that SWFs’ allocation to alternatives will continue to grow as their expertise increases and equities prices level out. The report said, given that certain experts expect a correction in the market in the short- to medium-term, the relevance of both principal preservation and downside protection may become more pronounced.