Gulf sovereign investors miss targets by 2% in 2015

Sovereign wealth funds have missed their targets for 2015 by nearly 2 per cent following 12 months of market volatility.

A study by Dubai-based firm Invesco found that the average annual return of 4.1 percent had undershot investors’ original target of 5.9 percent last year, while returns are expected to undershoot again in 2016 by 1.3 per cent.

The study, which covers 77 sovereign investors, including 10 in the Middle East,  representing $8.96 trillion of assets, found that real estate to be the fastest growing sector, as it is easier to access. More than 62 percent remain underweight infrastructure relative to their target allocation, whilst 52 percent are underweight private equity.

In particular, recent exemptions to the United States’ real estate investment tax for ‘qualified  foreign pension funds’ was said to have boosted the country’s attractiveness as a market in this allocation, while the United Kingdom’s had flatlined in all allocations.

The real estate sector’s popularity boom was also attributed to its ease of execution compared to private equity and infrastructure, alongside a long list of potential operators and developers to partner with. As such, 63 per cent of Middle East sovereign investors are underweight infrastructure and 50 per cent underweight private equity, relative to target allocations.

Invesco head of investment EMEA and Middle East and Africa institutional sales Alex Millar said: “In the long-term, their targets have been about 6 per cent, but the actual returns have been more like 4.1. They expect to miss them again and this isn’t really a surprise to them. But what we picked up was that there was no real sense of panic; they were accepting that long-term returns do seem to be a strategic return target . They didn’t expect the long-term targets to be reviewed, that was a strategic target. They understand they missed them, but in a sense they were prepared for them.

“The ones that were struggling for returns were the investment sovereigns – these were quite notable. But again this is not a surprise; these tend to be the longer term investment, so there is a greater risk in the longer term with performance volatility. Some of the liquidity sovereigns, which have kept more short-term investments. Pension funds, development and liability sovereigns we found had relatively better performance. The liability sovereigns tend to be the pension funds and tend to report in foreign currency, so there probably was some currency benefit there. The developments tend to have a lot of private equity exposure.”

Invesco also found investors had become less willing to overlook political and regulatory concerns in Brazil, Russia and China in order to hit target allocations, Invesco said. From year-end 2014 to 2015 the average asset allocation to Russia and central Europe fell to 1.5 percent from 1.9 percent, whilst China fell to 1.7 percent from 2.2 percent.