Spooked public investors reach fork in risky road as asset growth slows

Thursday, 13 June 2019 00:12 - - {{hitsCtrl.values.hits}}

LONDON (Reuters): Global public institutions including central banks, sovereign wealth funds and public sector pension funds are increasingly worried about a worldwide economic downturn and are taking divergent investment strategies to adapt.

An annual survey of 750 institutions from 183 countries with assets valued at $ 37.8 trillion, equivalent to 43% of the global economy, found that 43% had sought to raise their risk budget and move into higher-yielding assets, while 37% had simply accepted a lower return.

And some big investors, such as the Swiss National Bank and Japan’s Government Pension Investment Fund (GPIF), had a drop in assets for the first time since the Official Monetary and Financial Institutions Forum (OMFIF) began its survey in 2014.

Overall, growth in assets held by public sector institutions slowed to $ 1.4 trillion or 3.7% in 2018, down from 7.6% in 2017, as weak equity markets, which experienced one of the worst years since the 2008 financial crisis, took their toll.

“Despite a return to dovishness among the world’s major central banks over the year, public investors are concerned about a potential global downturn and its impact on their portfolios,” the survey seen by Reuters on Tuesday added.

A trade war between the US and China has raised concerns that it might tip the global economy into recession, driving a sharp fall in US Treasury and German bond yields in recent weeks as investors have sought out safer assets.

“This environment presents great challenges for public institutions,” the report said, noting that 68% of central banks highlighted capital preservation as their most important goal, with a focus on safety and liquidity as investment objectives.

Risk for returns

Despite such worries, many public sector investors plan to continue raising investments in riskier assets, with 23.5% intending to expand equity investments and 14.7% aiming to raise allocations to corporate bonds, infrastructure and real estate.

“Return remains important to reserve managers, especially where operations are particularly exposed to the public spotlight,” the report said.

The best performers during 2018 were sovereign funds, whose assets posted the strongest growth of 7.9%, helped by higher oil prices. Assets of pension funds grew 4.8%, while those of central banks expanded by only 0.1%.

Around 28% of the $ 1.4 trillion rise in public sector institutions’ assets was accounted for by four institutions: China Investment Corporation, Mubadala Investment, Kuwait Investment Authority and the US Military Retirement Fund.

Mubadala’s 79% rise resulted from its merger with fellow state-backed fund Abu Dhabi Investment Council during the year, while China Investment Corporation’s assets rose 16% on returns from state-owned capital and Belt and Road overseas investments.