Alternative investments now make up almost a quarter (23%) of all sovereign wealth funds (SWFs) asset allocations, according to a report from PwC.
The report, The rising attractiveness of alternative asset classes for Sovereign Wealth Funds, finds that SWFs have broadened their investment strategies since 2014 due to the pressure felt from falling oil prices as well reduced yields in traditional asset classes like fixed income. This has resulted in an increasing allocation to private equity, real estate, gold and infrastructure.
The trend is particularly observable in the Middle East which is home to some of the largest SWFs, many of which were affected by the collapse of oil prices in 2014 – the liquidation of SWFs holdings in Qatar and Saudi Arabia were instrumental in stabilising their respective economies.
Globally, assets have continued to rise in the SWF sector, albeit at a slower pace than in previous years. And with oil prices expected to rise again due to lower production levels, PwC expects the investment in alternatives to continue as SWFs look for increased diversification, principal protection, better performance and a hedge against inflation.
However, the report also warns that the risk of illiquidity, complexity and cyclicality means that “finding the right allocation is crucial” as is the need for continuous portfolio monitoring and reallocation to reflect economic developments.
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