Sovereign Wealth Funds Face the Winds of Change (BNY Mellon)

April 2014

KEYWORDS: Sovereign Wealth Funds, China, asset management, risk management


Rumi Masih, Ph.D.

  • BNY Mellon


Sovereign wealth funds (SWFs) face a dilemma as their domestic priorities and global financial markets evolve. On one hand, their capital reserves have grown to their highest level ever. On the other hand, the governments of many funds’ home countries face growing demands for spending to meet domestic needs including social safety nets, investment in housing and infrastructure, programs to confront structural youth unemployment and rising import bills. This is increasingly focusing attention on the question of portfolio versus development needs when it comes to setting strategic policy for many of these funds. At the same time, the long, gradual unwind from fixed income securities has started for many funds, but the opportunities for reallocating across equities or other asset classes are not obvious. Risk premia for emerging market assets may shrink in the future as large emerging markets such as China seek more stable growth paths. The structural rally in commodities that began in 2004 shows signs of having ended and geopolitical tensions are adding their own uncertainties to the investment landscape. Better understanding the challenges these funds are facing helps us identify the trends we are likely to see over the next three to five years and possible shifts in their strategic policies. This in turn should provide important insights into the implications for investment flows, product innovation and the advisory business of the asset management industry. The following discussion looks at what we think are the major challenges facing SWFs.

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