Sovereign wealth funds turn to internal fund management to boost returns, cut costs

  • SWFs rely more on in-house fund managers to cut costs
  • Funds hope shift will also boost performance
  • Sovereigns want to be seen as investors with deep expertise

Although falling oil revenues have dampened inflows into sovereign wealth funds (SWFs) in the Middle East and elsewhere, the sector is still a huge pool of capital.

So sovereign funds’ increasing reliance on their own fund teams is significant for investment banks and asset managers, who have courted SWFs in recent years as other areas of finance suffered in the aftermath of the global financial crisis.

For its Global Asset Management Study, Invesco Asset Management, part of Invesco Ltd, surveyed 59 state-owned investment funds worldwide with over $7 trillion of assets under management.

The percentage of real estate assets managed by in-house teams across the 59 SWFs jumped to 42 percent in 2015 from 31 percent in 2013, the report showed. The percentage of global equities managed in-house rose to 34 percent, from 26 percent at the end of 2013.

“This is a continuing shift to in-house capacity … with sovereigns wanting to be seen as leading institutional investors with deep expertise,” Nick Tolchard, head of Middle East at Invesco, told reporters in Dubai.

SWFs also see the shift as a way to cut costs, get more value for money and handle risk better, he said.

Sovereign wealth funds in the Middle East have the highest return expectations of sovereign funds globally, on average seeking around a 9 percent per annum return on their cash, said Tolchard.

Last week, the Abu Dhabi Investment Authority, one of the world’s largest SWFs, said the amount of its assets handled by external managers had fallen to 65 percent at the end of 2014, from 75 percent a year earlier.

In recent months, the fund hired a number of people to run different parts of its portfolio, including its first head of U.S. equities in its internally managed equities portfolio and its first global head of equities in its externally managed equities portfolio.

SWFs are also looking to leverage in-house expertise by branching out into managing third-party assets, which generate returns and also enhance the funds’ reputation.

However, there were still areas where SWFs were using external managers extensively, especially when it came to investing in infrastructure and private equity.

The percentage of assets handled by external managers in infrastructure rose to 84 percent from 74 percent in Invesco’s 2013 survey.