GLOBAL - Middle East sovereign wealth funds (SWF) have increased their property allocations by 23% so far this year but have also increased their focus on their domestic markets, according to Invesco.
In a report published this week, researchers attributed the mounting interest in "tangible, income-generating assets" to a reduction in risk appetite and increased interest for regional safe havens such as the United Arab Emirates (UAE) and Qatar.
The report, which focused on funds within the Gulf Cooperation Council (GCC), found a reduced level of investment in vehicles that offered international diversification, while, allocations to local development projects across SWF categories have increased.
Despite a belief among a majority of respondents that local investment would increase, the report's authors said diversification vehicles would likely remain crucial to the asset management industry despite a reduction in assets "under any scenario".
Invesco's investigation of SWF investment behaviour found that funds with a development mandate were more likely to invest predominantly in local or regional assets.
In contrast, institutions that set out to pursue government strategies have invested predominantly on an international basis - but even these support local development objectives.
While diversification vehicles tend to use the MSCI world index as benchmark, those with a focus on asset management typically have strong local exposure based on insights into markets they know well. SWFs own 88% of GCC investable assets and 74% of new assets.
Meanwhile, despite asset flows from volatile North African states into regional safe havens such as UAE, the report suggested this could effectively represent short-term 'hot money', in contrast to economic drivers for net inflows into Qatar and Saudi Arabia.
Noting a 17% shift towards passive investment strategies, the report's authors also pointed to a shift this year away from a three-year trend for SWFs to invest in external funds as they build up their in-house asset management and direct investment. According to the 2012 data, there is no evidence of a year-on-year increase in the trend, with in-house and direct investments remaining broadly static.