Flight to safety complicates low yields

Risk assets set to benefit

Official institutions are fairly conservative investors. Of the $19.5tn in assets managed by the 92 institutions part of this year’s Global Public Investor asset allocation analysis, more than half is in government bonds. Still, allocation to the asset class has fallen for all three GPI types.

Compared to last year, holdings of sovereign debt fell almost two percentage points across the sample. Motivated by a search for yield, many have boosted allocation to riskier asset classes. More than 22% of GPI assets are now in equities, and almost 10% are in corporate bonds. Around 7% are in alternatives, with the remaining 9% in gold, cash and other assets such as high-yield debt.

However, the overall figures mask substantial differences among investor types. Sovereign funds have made the biggest pivot away from government bonds and have the lowest exposure (19%) to the asset class. Most of their assets are in equities, while more than one-fifth are in alternatives, particularly real estate and private equity. This represents a substantial continuation of their push into risk assets compared to last year’s results, where allocation to these alternatives was estimated at 16%.

Pension funds are somewhat more conservative, with just under half of their assets in government bonds. Yet their allocation to risk assets, especially public and private equities, is growing rapidly, with concerns around returns and funding mismatches driving these institutions into more exotic products.

Central banks are the most conservative type of GPI, with more than 75% of their assets in government bonds, cash and gold. Many central banks are legally prohibited from investing in riskier and illiquid asset classes.

Still, over the past few years some governments have moved to give central banks more flexibility, and those allowed to have been expanding their allocation to equities and corporate bonds. Almost one-fifth of assets held by the 55 central banks covered in Global Public Investor 2020 are now in these two asset classes. This is substantial considering that more than half of these authorities do not invest in equities or corporate bonds at all.

In exploring new asset classes, central banks face familiar obstacles: 49% and 55% suggested that ‘governance and administrative set-up’ and ‘knowledge of the asset class’ respectively are significant obstacles to incorporating new portfolio products. Questions on internal capacity-building remain key, especially in the context of private markets and sustainability.

Danae Kyriakopoulou is Chief Economist and Director of Research at OMFIF. 

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