Official institutions around the world are planning to ramp up exposure to new markets and alternative assets in a bid for higher returns, according to a new study.
State Street said its research showed 80% of official institutions – sovereign wealth funds (SWFs), central banks and public pension reserve funds – expect to increase investment in new markets. Alternatives are also in sight, including hedge funds, private equity, property and infrastructure.
Joe Antonellis, vice-chairman at State Street, said: “Official institutions are at different stages in terms of how and where they can invest, but it is clear that those institutions with a more flexible investment mandate are recalculating their approach and looking to new markets and asset classes as they search for yield.”
He added that the resulting diversity of institutions’ portfolios would present new challenges.
Rod Ringrow, head of official institutions solutions for EMEA at State Street, said emerging markets securities were the main type of new asset being targeted by official institutions. He said it was primarily SWFs that were planning to target alternatives such as infrastructure, hedge funds and private equity.
The increase in exposure to new assets is likely to be small in percentage terms for central banks and emerging market securities, he added.
“With other asset classes, there are limited investment options, so allocation won’t be huge,” he said.
Ringrow cited last year’s example of the Bank of Israel planning to increase its stock holdings to as much as 6% of foreign-exchange reserves, from just 3% at the end of 2012.
“We may see SWFs collaborate for investment opportunities,” he predicted.
More than 70% of respondents to the study, which polled more than 60 senior executives at the institutions, said it was a challenge to keep up with regulation changes across global markets, while 51% said the biggest challenge was correctly measuring and monitoring the amount of currency risk taken.
Higher interest rates were seen by 38% as one of the hurdles on the road to expanding investment into new markets and asset types, while 37% were worried about emerging market volatility, the study showed.
Institutions were also concerned about the rising cost of execution due to collateral issues and extra reporting requirements, with 35% of survey respondents citing this. A quarter of respondents saw their biggest challenge in managing the complexity that came with alternative investments.
In the study, 60% of respondents said they planned to increase investment in their risk-management systems and processes over the next two years. However, 32% said they had difficulties hiring staff with risk, compliance and reporting skills.