New Research from State Street Shows Official Institutions are Focusing on Risk Management, Governance, Technology and Talent as They Diversify Their Investment Portfolios
Faced with a challenging investment environment, official institutions globally are adapting their investment and operating models to be more agile, according to latest research titled, “Official Institutions: Transforming to Meet the Needs of a New World,” by State Street Corporation (NYSE:STT).
The global survey of more than 100 official institutions, defined as central banks, sovereign wealth funds (SWFs) and government pensions, highlights the challenges stemming from an uncertain investment climate. Seventy-seven percent of surveyed central banks are most impacted by potentially rising interest rates, while 90 percent of SWF and government pension fund respondents say an equity market correction will have a moderate or significant impact on their investment strategy over the next three years.
As uncertainty persists, official institutions are diversifying their portfolios and looking at new asset classes and markets. In particular, SWFs and government pension funds are showing strong appetite for alternative investments, with 68 percent of the surveyed SWFs looking to increase allocation to commodities, and 88 percent of surveyed government pensions to real estate in the next three years, in the hope of achieving returns that beat equity markets.
Despite the weakened outlook for growth in China, Asia remains the most attractive region for investment with 89 percent of Asia-Pacific (APAC) institutions and 63 percent of institutions from other regions planning to increase their investments there.
Diversification Requires New Ways to Manage Risk
“A volatile investment environment calls for organizational agility and official institutions are learning to adapt and become more agile,” said Kevin Wong, senior managing director and head of Sector Solutions for State Street’s Global Services and Global Markets business in Asia Pacific. “They demand strong, flexible investment teams supported by a nimble operating model that help them identify opportunities, manage risk exposure, and take corrective action.” In recognition of the need to respond quickly to opportunities and threats as they arise, official institutions globally have embarked on a journey to build a number of adaptive skills into their organizational DNA:
“Official institutions play a vital role in safeguarding the world’s economic growth and stability; the extent to which they are shifting tactics is sure to differ as a result of their different mandates, objectives, and circumstances,” added Rod Ringrow, senior vice president and head of Official Institutions EMEA. “Above all else, they need to be more adaptable than ever in a continually shifting investing environment to ensure long-term success.”
On behalf of State Street, Oxford Economics, a global research firm, conducted a survey of official institutions during September and October 2015. The survey captured 102 responses from senior executives around the world. Of these, 52 came from central banks and the remaining 50 from sovereign wealth funds (SWFs) and public pension reserve funds.