Sovereign wealth funds' investment moves are becoming more closely aligned with the global asset management industry as they mature, and their growing size makes it harder for them to make contrarian bets, a report showed.
But the move to more mainstream investment allocations could raise doubts about their ability to step in and help support the global economy in the event of a downturn.
Sovereign wealth funds for a long time stood out as contrarian. Several stepped in and bailed out ailing U.S. and European banks in the global financial crisis, a move that proved highly profitable for many when they later sold on their stakes. In 2012-14 as some sovereign funds from oil-rich nations shed stocks and other assets, other investors moved into equities.
But more recently those differences largely evaporated, according to a report from asset managers State Street Global Advisors.
During 2016-18, sovereign wealth funds' allocations to private markets, such as real estate, infrastructure and private equity, grew at a slower rate than previous years and at a similar level to the global asset management industry. They also cut back in equities, cash and fixed income to a broadly similar degree, the report noted.
"A lot of sovereign wealth funds are now ageing and that matters for how you approach asset allocation as when you're scaling up your fund you're more likely to simply follow an existing template, i.e. mirror your peers," said Elliot Hentov, co-author of the bi-annual report on the investment trends among 35 sovereign funds.
"There's also an issue of scale. As funds get larger that can provide a constraint on the markets they want to invest in. You can still make selective contrarian bets but your portfolio is likely to be more fixed."
Sovereign funds' investment changes are likely to be broadly stable in the coming two years, indicating that the recent changes in their allocations were more structural than cyclical, said Hentov.
That could make it less likely they would step in to buy distressed assets in private markets in another downturn, as they did during the global financial crisis.
"During crisis moments some might again step in when valuations are low, but they'll be less contrarian," said Hentov.
"They'll generally be more cautious of placing additional funds into the private markets as it would require a significant relaxation of risk tolerance, particularly where faced with extended holding periods of their existing commitments."
But while sovereign funds are more closely synchronised with other global investors, the report also highlights differences.
Almost as many funds raised allocations to cash and equities as cut back during 2016-18, in contrast to previous years when funds tended to make similar moves.
Oil funds continue to have a markedly higher average allocation to so-called alternative investments, such as real estate and private equity, than other non-oil funds.