Sovereign wealth funds (SWFs) are having to reassess several aspects of their operations, not unlike other fund managers, in the wake of the global financial crisis, according to a State Street report about the sector.
The strategic objectives of SWFs is one aspect that has attracted a lot of scrutiny during the global credit crunch, with pressure brought to bear on a few of the funds to help moderate the effect of the financial crisis as well as provide for the liability in question.
It meant some SWFs had to change their mandates to include investments in domestic assets and specific domestic institutions, State Street head of sovereign advisory Andrew Razanov said.
And that shift in objectives could change the way SWFs operated in the future, Razanov said.
“If it can be demonstrated that such sizable strategic investments can lead not only to superior long-term financial returns, but also skill-enhancing and productivity-boosting transfers of proprietary information and technology [in the case of electrical engineering and consumer electronics investments], then combining a financial objective with a strategic policy objective could become more compelling,” he said.
Another area under review is the use of risky assets in a portfolio and how to balance this use with an appropriate level of liquidity.
A large number of SWFs saw all of the asset classes they had invested in fall together at the height of the investment markets downturn, Razanov said.
“SWFs are likely to conduct a thorough analysis of their asset allocation, portfolio construction and risk management approaches and assumptions,” he said in the report.
“A new generation of risk models will emerge that use more robust scenario analysis and stress tests for the kinds of multiple standard deviation events that have occurred with disturbing frequency over the last few years.”
