Sovereign wealth funds to increase real estate, infrastructure exposure

GLOBAL – Sovereign wealth funds will increase their allocations to real estate and infrastructure in an attempt to diversify portfolios currently over-allocated to bank equities, according to a report from TheCityUK, a body representing the UK financial services sector.

Marko Maslakovic, senior manager for economic research, said the underperformance of financial services sector investments made during the financial crisis had left sovereign wealth funds with negative domestic publicity.

"They're more cautious now and more focused on diversification," he said.

In contrast to funds' equities portfolios, which are likely to comprise smaller stakes in diverse companies, their allocations to real estate and infrastructure will continue to focus on direct investment in significantly sized assets.

Real estate was the most invested sector after financial services between 2005 and 2012, with around $60bn (€46.3bn) committed.

Last year, it accounted for $10bn in mainly prime real estate transactions.

"Real estate will be a beneficiary of diversification," said Maslakovic. "It will be the same kind of [direct] investing – but more of it."

Although there was a pick-up in the fourth quarter, sovereign wealth funds' direct investments last year fell 46% from their 2009 peak to $57bn against a retrenchment in funds' domestic markets.

Overall, funds still invest only around 5% of their overall portfolios directly – a percentage Maslakovic acknowledged did not "sound like much".

But he pointed out that the allocation to asset classes such as real estate and infrastructure amounted to $500bn.

Funds' assets under management (AUM) increased 8% last year to $5.2trn.

TheCityUK forecasts AUM will total $5.6trn by the end of 2013.

The figure excludes public pension reserve funds, which account for $7.7trn.

One of them, the Norwegian oil fund, manages 13% of global assets.

The organisation predicts the 24-member, AUM $4trn International Forum of Sovereign Wealth Funds will follow the Abu Dhabi Investment Authority, GIC and the Korean public pension fund in setting up an international office in London.