Regardless of whether it’s a sovereign wealth fund, another institutional or retail investor doing the allocation, every investment should be considered with three things in mind: The long-term perspective, investor’s risk appetite and their liquidity requirements.
That’s the key takeaway shared by Josette Rizk, director of institutional clients for the Middle East and Africa at Invesco. Speaking to Arabian Business on the release of Invesco’s ninth annual sovereign wealth fund (SWF) and central bank study – based on surveys of 141 institutions covering $19 trillion in global assets – Rizk says that liquidity, in particular, has come into sharp focus for investors over the past year, as economies struggled to cope with the shocks wrought by the coronavirus pandemic.
If there’s one thing an individual can learn from a SWF, it’s the value of diversification. “[SWF] allocation is diversified across a number of asset classes, and this helps them sustain or weather different market cycles,” says Rizk.
Alternative assets and real estate
Another trend she’s seeing with Middle Eastern and international SWFs is a pivot towards alternative assets.
“We’ve seen an increase in liquidity requirements for sovereigns in 2020 and 2021, specifically due to the pandemic and SWFs having to support their local governments and economies.” Like SWFs practice, she adds, asset allocation should be diversified across different classes – including alternative assets such as real estate investment trusts (REITs). In what was already a low-yield environment – a situation exacerbated by the pandemic – real estate portfolios have stepped in as income-generating assets, explains Rizk.
While the Invesco report notes a high home-market bias for the region’s sovereign wealth funds – 57 percent of survey respondents favoured allocation to their domestic cities – Rizk has noticed a strong trend towards diversifying “the alpha generation bucket”. The funds declared an intention to increase their allocation to North America (43 percent) and the emerging Asia-Pacific (29 percent) regions in particular.
In Kuwait, more than half of the $700-billion Future Generation Fund is in US assets, including real estate.
When it comes to sectors of real estate, Rizk says the funds are looking at opportunities that will provide the most attractive yield over a five-year window. “Seventy-one percent of Middle Eastern sovereigns believe data centres will be a main focus for them; 57 percent residential; and 29 percent industrial,” she explains. Speaking at an economic forum last month, Mansoor Bin Ebrahim Al Mahmoud, chief executive of the Qatar Investment Authority (QIA), said the fund will be focusing on warehousing and data centres as other property sub-sectors are still impacted by the pandemic.
Similarly, Bloomberg reported that the Abu Dhabi Investment Authority (ADIA), which manages $700 billion in assets, will also be shifting its focus towards warehouses, life sciences properties, technology hubs and affordable housing.
ESG to the fore
A common theme highlighted in this year’s report is environmental, social and governance (ESG). Rizk singles out sustainability and climate change as concerns of sovereign fund managers. “We tracked a significant increase in the incorporation of ESG principle in the sovereign and the central bank space in this region,” she says, adding that in the four years since Invesco began incorporating ESG into its survey, the proportion of SWFs incorporating its principles into their investment decisions has grown from 46 to 64 percent.
For Middle Eastern funds, ESG principles are a source of long-term performance and long-term alpha. “From a real estate perspective, it’s interesting to see that Middle Eastern sovereign funds highlighted climate change as a significant risk for real estate portfolios – and 88 percent are now increasing their consideration of climate risk when making any decisions, especially long-term real estate investment decisions.”
For Gulf SWFs, long-term planning for ESG investments aligns with their respective economies’ plans to diversify away from dependence on energy prices. It’s why ADIA, the Kuwait Investment Authority, QIA and Saudi Arabia’s Public Investment Fund (PIF) were among the founding members of One Planet Sovereign Wealth Funds.
Rizk points out Saudi Arabia’s Vision 2030, and the corresponding investments being made in green technologies, as an example. Last month, PIF reportedly asked Saudi banks to help it develop a framework for ESG.
“SWFs also recognise the fundamental role that ESG investments have in supporting new industries such as hydroponics (growing crops without soil) and vertical farming. The opportunities for relatively early-stage themes such as mobility, electrification and carbon reduction have come into focus as SWFs aim to break the linkage between economic growth and carbon emissions in order to deliver a low carbon future.”
Mubadala, Abu Dhabi’s sovereign wealth fund, is incorporating ESG principles through its responsible investments arm. Masdar, a clean energy company under Mubadala’s umbrella, recently announced that it will develop photovoltaic panel farms in Uzbekistan – the country’s first solar public-private partnership project.
All roads lead to China
Another hot investment zone for SWFs, particularly Middle Eastern ones, is China. “Two-thirds of Middle Eastern SWFs said that the pandemic had made China more attractive,” says Rizk. The country’s speed and effectiveness in its initial response and a comparatively strong economic recovery since are the key reasons for this interest, she explains.
Pandemic or not, the country offers SWFs high local returns on long-term investments. “The factors driving these returns include a strong outlook for local consumption, driven by a growing middle class, and rapid embrace of digital technologies.” The Chinese technology industry is viewed by SWFs as an attractive source of long-term alpha, she says.
There are some obstacles. Eighty-six percent of the Invesco SWF respondents said increasing political tension between the US and China would influence their asset allocation, with other factors including the inability to convert to RMB, a lack of alignment on ESG investments, and a comparative lack of investor rights.
However, SWFs remain bullish on China – 40 percent plan to increase their investment allocation there over the next five years. “China is a growing conversation, and long-term asset allocation and long-term alpha are key.”
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