Sovereign wealth funds re-think diversification and portfolio resilience: Study

Sovereign wealth funds re-think diversification and portfolio resilience: Study Portfolio resilience is now central to sovereign wealth funds’ portfolios, according to an Invesco survey. Portfolio resilience is now central to sovereign wealth funds’ portfolios, according to an Invesco survey. Sovereign wealth funds are increasingly treating portfolio resilience as an explicit objective rather than a byproduct of diversification amid changing correlations and geopolitical risks. This is according the Invesco Global Sovereign Asset Management Study, which surveyed sovereign investment professionals at wealth funds and central banks collectively managing $29trn in assets. The study found that 71% of central banks (CBs) and 54% of sovereign wealth funds (SWFs) say that “resilience” considerations are becoming as important as return in portfolio design. SWFs and CBs characterised resilience as long-term capital preservation, protection against tail risks, the ability to absorb short-term shocks and the ability to perform across different macro regimes. Catherine Chan, head of institutional sales, Greater China and Southeast Asia at Invesco, said: “The geopolitical shocks of 2026 were just the latest in a multi-year series of external events that have dramatically impacted markets.” “Sovereign investors need to ensure they have a clear view of how the geopolitical environment may shape their portfolios, which is why we have seen resilience, scenario planning and risk modelling become top priorities.” Most SWFs and CBs already regard resilience as an important consideration and expect its role to increase over the next five years, according to the study. It also found that respondents are increasingly questioning the bond-equity relationship that has underpinned many portfolio construction frameworks for decades. An Apac liability SWF commented that while bonds still help, “they do not solve everything on their own” while a European CB argued that changing correlations have made traditional reserve management models feel outdated. Chan said: “Assumptions that shaped portfolio construction over the past decade are being revisited simultaneously: what diversification actually delivers, where returns will come from, how much can be relied on from passive market exposure, and whether the financial infrastructure that sovereign investors rely on can be taken for granted.” Indeed, during 2022, many investors were caught off guard when both equities and bonds fell as central banks dramatically increased interest rates to combat inflation. Performance of global stocks and bonds between 2021 and 2023 To combat different potential economic scenarios, the study found that now instead of anchoring portfolio construction to a single base case, leading SWFs are testing whether portfolios can remain resilient across a wider range of economic, inflation and geopolitical scenarios. As such, they are paying greater attention to liquidity, real assets and inflation-linked exposures. The study also found that several large Apac investment SWFs have already moved away from nominal bond-heavy frameworks after identifying inflation volatility as the most significant structural vulnerability. In terms of where SWFs and CBs are looking for portfolio resilience, 80% of respondents cited energy security and energy transition infrastructure as the most credible resilience investment theme. They favour the sector’s durable demand, inflation linkage, and cash flows that hold up when broader market conditions deteriorate. A North American liability SWF said: “Energy security offers the greatest resilience benefits, closely followed by critical infrastructure.” Critical infrastructure assets such as investments into transport, utilities and electric grids were the second most credible investment theme cited by 64% of respondents, according to the study. Portfolio resilience is now central to sovereign wealth funds’ portfolios, according to an Invesco survey. The internal promotions are across the region.