State Street Corporation and the International Sovereign Wealth Funds Forum (IFSWF), a global network of sovereign wealth funds, released a report detailing the abandonment of risky assets by large institutional investors.
The report examines the aggregate activities of long-term institutional investors from 40 countries representing more than $43 trillion in assets under custody and administration at State Street.
It also includes information drawn from interviews with a selection of the world’s largest sovereign wealth funds in Central Asia, East Asia, West Asia, Australasia and North America.
The report reveals the risk aversion of institutional investors in 2021, as evidenced by the fact that State Street’s Behavioral Risk Scorecard – an aggregate measure of risk appetite derived from capital flows and holdings of institutional investors across multiple asset classes and factors – turned negative in early February 2022 and hit a two-year low.
Institutional investors’ decisions about capital flows had become broader, with evidence of risk-averse behavior manifesting in investors’ decisions about equities, fixed income, foreign exchange, and asset allocation over the past few months.
Neill Clark, Head of State Street Associates, Europe, Middle East and Africa (EMEA), said: “As economies around the world emerge from the shadows cast by the COVID-19 pandemic, investors are facing new risks. Today, risk assets are re-priced due to international conflicts, inflation and central bank policy responses.
“After a period of opportunistic rebalancing and selective risk-taking in 2020, the past year has seen institutional investors move into safer assets and markets. increase their equity exposure more – which they had been doing since the first quarter of 2020 – and instead increase their fixed income and cash balances.
The report found that strong capital outflows from emerging markets – the highest level of selling seen in the previous five years – had been accompanied by strong demand for equities in developed markets.
Duncan Bonfield, Chief Executive of the ISFWF, said: “When it comes to sovereign wealth fund investment strategies, most take a long-term view, which can sometimes mean going against the grain.
“For example, one of our members increased his positions in emerging market equities as the value/price gap widened, as emerging market equities were cheaper than six months ago compared to to its estimates of fair value.”
In fixed income, the report found that heightened geopolitical risk led to capital outflows from emerging market sovereign debt, while high-quality developed market sovereign bonds maintained stable capital inflows despite the surge. domestic inflationary pressures.