For many of the world’s leading public pension and sovereign funds, so far the 2020s won’t be remembered as the fondest of times. These are long-term investors who typically try to see through the ebb and flow of external influence. They are stewards of public money whose horizons should be far into the distance, rather than underneath their noses.
The triple impact of the Covid-19 pandemic, the return of inflation and conflict arising from heightened geopolitical tensions ripped up the typical public fund’s playbook. But while the last of these factors remains in play, the easing of concerns about inflation is allowing these influential investors to go back to a more risk-on, long-term approach.
This is a key message that emerges from OMFIF’s Global Public Funds 2024 report, informed by surveys, discussions or contributions from 28 global public pension and sovereign funds with more than $6.5tn in assets under management. Over the long term, our survey shows these investors are assessing the impact that technological change – such as the growth of artificial intelligence – will have both on the way they manage their portfolios and risk assessments internally, but also on how it will affect the markets they invest in.
Investment strategies and appetite for risk
Geopolitics continues to have a major bearing on how they view their investments. Concerns about the impact of tariffs and protectionism loom large. Where three years ago China was considered to be the leading developing market for investment opportunities, not a single survey respondent put China at the top of its list this year. Instead, India is now clearly the emerging market destination of choice for these asset owners, selected by 58% of respondents.
A more risk-on approach implies a shift from fixed income into public equities, and that is evident in this year’s survey. But there is a more fundamental shift – away from liquid, public markets and instead into illiquid, private markets.
Infrastructure, private credit, unlisted equities and real estate are four of the top five sectors where funds are increasing allocations over the next 12 to 24 months. This speaks to the role of many public funds as active owners: they believe that they can have more influence on the future performance of an investment as a direct investor, perhaps with a say on management or board composition, or via allocating funds to private equity firms.
Equally, the fast-growing interest in private credit markets indicates a willingness to forgo liquidity for improved returns. And with interest rates likely to fall or at least remain stable, funds see investments in areas such as infrastructure and real estate as a source of positive returns to their portfolios.
Transition finance and sustainable investment
One area in which global public funds are certainly spending a lot of time and resources in considering their long-term investment approach is sustainable finance. With more than $30tn of investable assets between them, public pension and sovereign funds could provide a large chunk of the capital needed to help the global economy meet its net-zero goals.
Funds are playing an active role in developing approaches to transition finance, subject to the need to provide fiduciary returns to their stakeholders. At the same time, these stakeholders in many cases are urging those that manage their assets to transition away from dirty or hard-to-abate industries.
OMFIF would like to thank all of the funds that gave us their time to share their investment approaches and their trust in our work. And we express our gratitude to the many funds that took part in our events and research throughout 2024. Our work in this area will expand in 2025, and we look forward to continuing to spotlight the approach of these hugely influential investors.
Clive Horwood is Managing Editor and Deputy Chief Executive Officer of OMFIF.
