Fixed Income Makes a Comeback in Sovereign Wealth Fund Portfolios

Although sovereign wealth funds expect inflation to fall, they believe it will remain elevated and are looking to adapt their portfolios to a new, higher-inflation environment, according to Invesco’s Global Sovereign Asset Management Study for 2023.

The report surveyed 142 CIOs, heads of asset classes and senior portfolio strategists from 85 sovereign wealth funds and 57 central banks that collectively oversee approximately $21 trillion in assets. It found that in a higher-interest-rate environment, funds are looking to rework their portfolios, which includes a transition back to fixed income and an increase in private debt investments.

“Amid persistent high inflation and real interest rates, investors are recalibrating portfolios,” Invesco’s report stated. “Sovereign wealth funds favor fixed income and private debt, while emerging markets—with solid demographics, political stability, and proactive regulation, particularly India—have emerged as prime investment destinations.”

Fixed-income allocations have slightly rebounded after two years of decline and now account for, on average, approximately 28% of the funds’ portfolios, up from 27%, while equity allocations have declined to 30% in 2023 from 32% last year.

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According to the report, some of the institutional investors surveyed said they bought as much fixed income as possible within their asset allocation limits and were considering revising their framework to accommodate the new interest rate environment. However, investors also said they have changed their approach to investing within the asset class after fixed income failed to provide a safe haven during the 2022 asset price correction.

“Respondents are instead adopting a more tactical stance, utilizing all available asset classes and believing that significant value can be added to a fixed income portfolio by actively rebalancing across different fixed income segments,” the report stated, adding that among alternative fixed-income segments, emerging market debt and high-yield bonds are the most widely held investments.

“However, we observed a strong appetite for private credit funds, with sovereign investors emphasizing the favorable risk-return profile of the asset class and high liquidity levels,” the report summarized. “Sovereign investors also noted that holdings are transparent and generally offer good diversification within the fund, as most funds are large-scale and invest in a wide range of issuers.”

Sovereign wealth funds have also continued to increase allocations to alternative investments, which now account for approximately 27% of their portfolios, excluding direct strategic investments, according to the report. It also said that allocations to infrastructure increased over the past 12 months, with the asset class now accounting for 7.1% of portfolios, offsetting a decline in real estate investments.

“Sovereign wealth funds continue to find private assets appealing, but performance disparities have prompted investors to exercise more judicious selection,” the report asserted. “Infrastructure, especially renewable energy, has emerged as the preferred sector. Evaluating debt metrics and prioritizing organic growth over leverage-dependent returns have become critical components in investment decision-making.”

Among the different private asset segments, according to the report, the most significant hurdle for funds is securing deals and accessing the best managers, particularly for new and smaller sovereign wealth funds. Over the past year, large sovereign wealth funds, such as those funded by energy reserves, have been well-positioned to develop a strong pipeline and secure additional access to top-tier funds, while more capital-constrained investors have fallen by the wayside.

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Tags: Alternative Assets, Central Bank, CIO, Fixed-Income, Global Sovereign Asset Management Study, high-yield, Inflation, nvesco, private assets, Sovereign Wealth Fund

Michael Hood

The Church Pension Group, the investment manager for the Episcopal Church’s $18.4 billion pension fund, has named Michael Hood as its new CIO, effective Tuesday. He succeeds Roger Sayler, who retired at the end of June after nine years at the firm.

“We are excited to have Michael join the Church Pension Group,” Mary Kate Wold, CEO and president of the CPG, said in a release. “His impressive background in developing portfolio views and positioning for investors like CPG will serve our clients well and build upon the success Roger has had in managing our investment portfolio over the past nine years.”

Wold added that, “I want to thank Roger for his excellent and dedicated service, and we wish him the very best in his retirement.”

Hood joins CPG from J.P. Morgan Asset Management, where he was managing director in the company’s multi-asset solutions division and helped oversee portfolios totaling $350 billion. Prior to J.P. Morgan, Hood was chief economist at Traxis Partners, where he analyzed economies and markets in Asia, Europe and Latin America.

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Hood also held various roles at Barclays Capital, where he was an economist and market strategist for Latin America and emerging markets, and worked at JPMorgan and JPMorgan Chase & Co., where he served as an economist for Latin America. He was also at the Federal Reserve Bank of New York, where he was an economist developing risk studies.

“I am thrilled to serve in this role and support the Church Pension Group’s vision in serving the Episcopal Church,” Hood said in a statement. “I have long been familiar with CPG, as both my grandfather and uncle served as Episcopal priests. I look forward to building upon Roger’s achievements and ensuring that CPG remains steadfast in meeting its financial obligations to those who serve the church.”

As of March 31, the Church Pension Fund reported three-, five- and 10-year annualized returns of 13.7%, 11.5% and 9.9%, respectively, outperforming its benchmark’s annualized returns of 10.0%, 8.7% and 7.6%, respectively, over the same periods.

The CPF’s asset allocation, as of the end of March, was 24% in private equity, 22.2% in global bonds, 22.2% in specialized strategies, 18.5% in global equities, 9.1% in real estate, 3.5% in private specialty strategies and 0.5% in cash.