Sovereign wealth funds have been shifting from active to passive investment management strategies over the last 12 months as a result of turbulence in the financial markets, according to a survey by State Street Global Advisors (SSgA).
"When losses occur, questions are not only asked about the scale of the losses, but also, how they happened," SSgA Official Institutions Group senior managing director John Nugée said.
"The last few years have shaken the convictions and beliefs of many sovereign asset holders about the markets, investment theory and the correct way to manage asset portfolios," he said.
One Middle Eastern sovereign wealth fund told SSgA that in the past it had used active management as its default approach, but had decided to change to a passive default strategy.
"We conclude that assets should by default be managed passively unless evidence is clear that a given asset class has sufficient imperfections that active management is likely to be consistently rewarded," the unidentified fund said.
SSgA said sovereign wealth funds - which are among the behemoths of global investment - are also increasing their allocations to emerging-market debt in the belief that yields on traditional asset classes are falling.
Not only does emerging-market debt offer attractive returns, some sovereign funds also feel that they can be seen as a long-term safe haven in uncertain times for the major reserve currencies, SSgA said.
State Street said that some of the more sophisticated sovereign funds are also looking to identify new sources of value in order to improve portfolio diversification, and are considering investments in land, infrastructure and even art, the firm said.
However SSgA said more work is needed to refine this strategy into a quantifiable theory that can be used to build diverse portfolios.
