Declining yields in real estate and the expectation that risk-adjusted returns in the infrastructure sector will remain attractive are two of the reasons sovereign wealth funds (SWFs) plan to increase their exposure to global infrastructure, according to a study conducted by Invesco, a global investment manager based in Atlanta, Georgia.
For its second such survey, Invesco interviewed 52 sovereign investors, which included sovereign wealth funds, government pension funds, and central banks from around the world.
According to the report, sovereign investors plan to increase their exposure in all the major alternative asset classes in addition to infrastructure – including real estate, private equity, hedge funds, and commodities – in 2014 compared with what they invested in 2013.
For infrastructure specifically, 53 percent of respondents said they would increase their exposure to global infrastructure this year, compared with 47 percent in 2013 and 22 percent in 2012.
Demand for infrastructure is driven primarily by falling yields in real estate as global demand, particularly in developed markets, continues to grow; the belief that that the size and long-term nature of infrastructure investment matches sovereign objectives and capabilities; and a broad consensus that risk-adjusted returns are likely to remain attractive.
Less clear was whether infrastructure should be designated a separate asset class or whether it should fall within a broader alternatives category. Proponents of the latter cited the large one-off investment values and the limited availability of opportunities in the infrastructure space.
By increasing allocations to alternatives, sovereign investors decreased their exposure to equities or global fixed income in 2012, Invesco found in last year’s study.
“In 2013 these dynamics were different,” Invesco reported. “Respondents increasing new assets in alternatives typically cited a decrease in home-market fixed income or cash rather than global fixed income or equities.”
Geographically, the trend witnessed last year of sovereigns investing more new money in emerging markets continued across all alternative asset classes.
“This year the same trend has emerged with allocations to Africa, Latin America, China, India and emerging Asia all increasing in 2013,” the study’s authors stated, adding that many sovereign investors expect allocations to these regions to increase again in 2014.
Despite the increased allocations to emerging markets, a preference for developed markets remains, the survey found.