Geopolitical tensions were cited by 83 per cent of respondents as a major risk to global growth over the next year, up from 72 per cent in 2023, reflecting concerns over competition between the major powers and the potential for trade disruption. Sovereign wealth funds (SWFs) regard emerging markets as potential beneficiaries, pointing to the opportunities presented by trends such as near-shoring. As a result, 67 per cent of SWFs expect emerging markets to match or beat the performance of developed markets over the next three years.

SWFs also saw an average return of 7.2 per cent a significant improvement from the -3.5 per cent reported last year. Which was the first time, since the survey started in 2013, that SWFs had experienced negative returns.

Invesco’s study is based on the views of 140 chief investment officers, heads of asset classes and senior portfolio strategists at 83 SWFs and 57 central banks, who together manage USD22 trillion in assets.

Emerging markets primed to benefit from multipolar world

SWFs view strategic competition between the US and China as likely to create opportunities for emerging markets to attract investment, forge new partnerships, and assert their economic and political influence on the global stage.

The majority (54 per cent) expect this competitive dynamic to work to the advantage of emerging markets – versus just 12 per cent that disagree – as they benefit from trends such as ‘near-shoring’ whereby major economies strengthen their global supply chains and manufacturing and procurement strategies across multiple locations. SWFs expressed interest in exposure to these opportunities, either through direct investment in companies based in these markets or via multinational companies expanding their presences within them.

However, SWFs are increasingly adopting a nuanced approach to investing in these markets, considering their unique risks and opportunities and reflective of each country’s positioning in an increasingly complex and interconnected geopolitical landscape. Within emerging markets, Asia (ex-China) is seen as the most attractive region overall, with a particular interest in India, with its large domestic market, growing middle class and increasing global competitiveness. Latin America is also in the spotlight, particularly for Middle Eastern and Asian Funds with Mexico and Brazil seen as well placed for US near-shoring. China remains a large and important market for SWFs, whilst they navigate regulatory shifts and geopolitical tensions.

Within Emerging markets, EM debt is viewed as an attractive asset class for SWFs to diversify their portfolios. It is seen as offering attractive spreads over developed market bonds, providing a potential boost to portfolio income. Meanwhile, the improving economic fundamentals and policy reforms in many important emerging markets have enhanced their creditworthiness, reducing the perceived risks associated with investing in these markets. SWFs identified India as the most attractive destination for investing in emerging market debt. 88 per cent are interested in increasing their exposure to Indian debt, up from 66 per cent in 2022, reflecting improved confidence in the country’s economic prospects.

“Cautious optimism about the global economic outlook has been tempered by growing concern over competition between global powers”, says Rod Ringrow, Head of Official Institutions at Invesco. “The long-standing rivalries between the major powers have escalated, and the picture is complicated further by the sequence of important elections taking place this year, particularly in the US, which could have profound implications for markets.”  

The allure of gold in an uncertain world

The impact of geopolitics has also been felt by central banks, which are increasingly turning to gold to diversify their reserves and hedge against various risks.

The majority (56 per cent) of central banks agree that the potential weaponisation of central bank reserves makes gold more attractive, while 48 per cent believe that rising US debt levels have increased its appeal. “Gold’s status as a tangible, apolitical asset gives confidence to central banks”, continues Ringrow. “Especially given the challenge of finding viable alternatives to the US dollar as a reserve currency.”

Central banks are also looking to bolster their reserves over the next two years, motivated not only by long-standing geopolitical tensions but by upcoming elections in key markets. Central banks are mindful of the potential for election outcomes to trigger market volatility, currency fluctuations and changes in investor sentiment, leading 53 per cent to indicate their intention to increase the size of their reserves over the next two years, with only 6 per cent looking to reduce them.

‘Higher for longer’ outlook prompts caution on leveraged asset classes

Invesco’s study also revealed a widespread view that inflation and interest rates are set to stay higher than previously expected (43 per cent) of SWFs and central banks expect inflation to settle above central bank targets, with just over half (55 per cent) expecting targets to be met.

In total, 71 per cent of SWFs and central banks anticipate interest rates and bond yields to remain in the mid-single digits in the long term, which is having a significant impact on SWFs’ long-term asset allocation plans by prompting greater caution on highly leveraged and growth-oriented investments due to uncertain borrowing costs.

Infrastructure leads the way as the most popular asset class over the next 12 months, with a net asset allocation intention of 21 per cent, followed by listed equities (19 per cent) and absolute return funds/hedge funds (12 per cent). By contrast, SWFs’ sentiment towards cash (-11 per cent), real estate (-6 per cent) and private equity (-3 per cent) has diminished.

This outlook has also boosted the appeal of private credit, which has emerged as a compelling alternative to traditional fixed income, offering attractive yields and access to opportunities that do not exist in public markets. More than one-third (36 per cent) of SWFs have reported better than expected returns from their private credit investments, with just 5 per cent indicating that the asset class had performed worse than expected.

Private credit is also seen as offering attractive diversification from traditional fixed income, highlighted by 63 per cent of investors, and good value when compared to conventional debt (53 per cent).

Energy transition a priority theme for long-term investors

The energy transition continues to present challenges and opportunities for SWFs and central banks.

This year’s study revealed that the energy transition is viewed as an increasingly attractive investment opportunity, with 30 per cent of SWFs and central banks considering it a high priority allocation theme and a further 27 per cent holding some form of renewable and cleantech investments. “Development sovereigns and liability sovereigns in particular often have strong mandates for societal good alongside long-term steady returns that make these investments appealing”, says Ringrow. “The stable, predictable cash flows over extended time horizons are attractive to sovereign wealth funds, which are among the longest-term investors of all.”

The annual survey, which interviewed over 100 senior decision-makers at banks, wealth and asset managers, insurers, and financial sponsors, opened on 18 April and ran until 11 June 2024.

The survey revealed a significant increase in positive sentiment compared to 12 months ago. Almost half (48 per cent) of respondents believe economic growth will improve, an increase from 21 per cent in 2023 and 7 per cent in 2022, marking a two-year high. Similarly, 43 per cent expect growth in the financial sector, up from 27 per cent in 2023 and 12 per cent in 2022.

Confidence is strong when looking longer-term, too. Over two-thirds of financial institutions (68 per cent) are optimistic about the UK economy beyond 2025, and nearly two-thirds (62 per cent) share a similar optimism for growth in the financial services sector specifically.

This improving confidence in the macroeconomic environment is helping to bolster financial institutions’ own growth prospects, the bank says. The survey indicates that over half (59 per cent) of institutions are more optimistic about their growth over the next 12 months. To support these ambitions, respondents are looking to expand in existing markets (63 per cent) and enter new markets (50 per cent), while half (50 per cent) are planning to launch new products and services.

Some key factors that are driving this wave of optimism, include easing inflation and an expectation of rate reductions in the latter half of the year (62 per cent).

Lisa Francis, Head of Institutional Coverage, Lloyds Bank Corporate & Institutional Banking, says: “This year’s survey has revealed a significant shift towards optimism in both the UK economy and the financial services sector. This is in line with what we are hearing and seeing directly from our clients. Deal activity is ahead of last year and there’s positive momentum as this renewed optimism is fuelling our clients growth ambitions, whether by expanding into new and existing markets or launching new products and services.

“Overall, this paints an exciting picture for the UK’s financial services industry, which is crucial to the UK’s economy and our position on the global stage.”

The survey also revealed growing confidence in London’s status as a leading global financial hub. Most respondents (63 per cent) believe the capital will retain its position on the global stage, up from 50 per cent in 2023. 43 per cent of UK financial institutions believe that initiatives to encourage foreign direct investment into the UK would help further enhance London’s status.”

However, financial institutions remain cautious about the number of barriers to expansion, three-fifths (62 per cent) of respondents were apprehensive about geopolitical uncertainty, a significant increase from 22 per cent in 2023. A third (34 per cent) of financial institutions saw global trade barriers as a key obstacle to economic performance over the next year, while 41 per cent acknowledged the productivity challenges facing the UK.

Based in the United Kingdom, Waverton is an owner-managed investment management firm with offices in London, Edinburgh and Glasgow and GBP9.1 billion (approximately USD11.6 billion) in assets under management, as of 31 December 2022 (source: 2022 Annual Report).

Serving private investors, charities, financial advisers and institutional investors, Waverton’s aim is to generate inflation-beating returns over the long term, using an active and flexible, multi-asset investment approach through bespoke portfolios or specialist funds.

Northern Trust is supporting the trading of equities, derivatives and fixed income assets as Waverton’s sole provider of trading services. The appointment followed a review by Waverton of its operating model intended to help align its operational structure with plans to expand its product range and investment capabilities. It also resulted in two of its traders – Rene Naya and Sam Tresadern – joining Northern Trust.

Michael Allen, chief operating officer at Waverton, says: “Outsourcing our trading to Northern Trust provides Waverton with access to global markets, high-quality liquidity and operational scale, while also allowing us to continue benefiting from Rene and Sam’s valuable institutional knowledge of our business. In addition to both organisations’ strong service ethos and cultural fit, we are confident this combination delivers the service and operational resilience we require to support our growth aspirations.”

Glenn Poulter, global head of brokerage and ITS at Northern Trust, says: “We are excited to be supporting Waverton’s commitment to client service and focus on growth in our role as its outsourced trading provider. To date, our ITS client base has consisted primarily of institutional asset managers and asset owners, but we see increasing interest in this solution from wealth managers as they look to enhance operating capacity and future-proof their operating models. Our appointment by Waverton is testament to this shift and we look forward to working further with managers across this sector globally.”

Northern Trust won Best Outsourced Trading Solution Provider in the 2023 Institutional Asset Manager Service Provider Awards.

The firm writes that BSSF is designed to meet the strong demand for securitised assets from both institutional and wealth clients seeking access to diversify their fixed income exposures. Clients have demonstrated a desire for the diversification benefits, limited interest rate risk and the yield premium securitised assets typically offer versus corporate credit.

The fund utilises BlackRock’s experience across global Securitised assets, to identify unique and attractive investment opportunities. BlackRock manages over USD120 billion of securitised assets globally on the platform.

Kate Galustian, Lead Portfolio Manager, BlackRock Senior Securitised Fund and Head of European ABS, says: “The BlackRock Senior Securitised Fund leverages BlackRock’s experience in the Securitised market to identify unique and attractive investment opportunities that have the potential to offer clients attractive risk-adjusted returns throughout the cycle. The fund seeks to maximise total return by investing in high grade, predominately AAA, securitised assets, in a manner consistent with the principles of ESG-focused investing.”

Anne Parthiot-Mons, Head of BlackRock’s EMEA Institutional Client Business and Co-Head of BlackRock’s Global Consultant Relations Business, says: “In close collaboration with BlackRock’s global investment teams, clients, and investment consultants, we are delighted to offer our Securitised Credit capabilities in the shape of a pooled fund. The fund is designed to meet the growing international demand across institutional and wealth clients for securitised assets and the diversification benefits that they offer for clients’ fixed income exposures.”

Ajith Balan Nair, Head of Investment Research, ISIO, says: “We like high quality ABS as an asset class for the yield premium versus corporate credit, diversification benefits from exposure to consumer risk and the floating rate nature. More broadly, we see ABS as a versatile asset class that can play a wide range of roles in client portfolios ranging from allocations in collateral buckets to growth portfolios. BlackRock’s Senior Securitised fund is a good example of our focus, and we are happy to have engaged with BlackRock from the initial design stage.”

Nick Cooney, Senior Investment Consultant & Partner, Lane Clark & Peacock, says: “Securitised debt continues to be a core asset for institutional investors, so it is encouraging to see BlackRock embrace feedback and build a solution which closes a gap in its fund range. This development is particularly timely given the current strong demand from those seeking liquid investment strategies that offer favourable risk-reward characteristics.”

BSSF is actively managed and has an unconstrained investment style (it will not take a benchmark index into account when selecting the Fund’s investments) the three month SONIA compounded in arrears should be used by investors to compare the performance of the fund. It is an Irish domiciled Alternative Investment Fund and will invest in both primary and secondary offerings of securitised assets. The Fund adopts the following credit rating, geographical and sector constraints when managing investment positions:

Credit rating constraints: BSSF is focused on the higher quality portion of the capital structure – with a minimum exposure of 75 per cent to AAA assets and a minimum rating of AA-.

Geographical constraints: BSSF is predominately focused on European and UK assets but can also invest up to 25 per cent in the US (and other regions).

Sector constraints: BSSF will have a minimum exposure of 65 per cent to ABS and a maximum exposure of 35 per cent to CLOs.

The fund will be classified under the EU’s Sustainable Finance Disclosure Regulation (SFDR) as Article 8, with ESG factors acting as a core component of the team’s securitisation analysis, and with a skew towards issuance with positive social and / or environmental impact.

The Invesco Global Systematic Investing Study is an evolution of the Invesco Global Factor Investing Study, published annually since 2016. The firm writes that the reposition this year reflects the changes within the quantitative investing world, and the use of quantitative methods beyond just factors. The study, which is based on the views of 130 institutional and wholesale investors that collectively manage USD22.5 trillion in assets, also finds a growing consensus that the systematic toolkit can help investors navigate key challenges, such as volatile markets and imperfect data.

The report found that half of systematic investors have already integrated artificial intelligence (AI) into their investment process and reveals a widespread expectation that AI tools will transform portfolio management in the years to come. The majority (62 per cent) anticipate that, within a decade, AI will be as important as traditional investment analysis and 13 per cent expect it to become more important.

The AI revolution already underway

Systematic investors are already using AI across a range of core functions.

Respondents reported harnessing AI to better understand the market environment and identify macroeconomic turning points: (46 per cent) are using AI to identify patterns in market behaviour, and (38 per cent) are using it for portfolio allocations and risk management. Investors appreciate AI’s ability to help mitigate human biases and forecast the unexpected.

Investors expect the use of AI to grow significantly in the coming years. While a significant minority (29 per cent) already use it to develop and test investment strategies, the vast majority (76 per cent) anticipate doing this in future, and while (20 per cent) currently use it to monitor and adjust investments positions in real-time, more than half (55 per cent) expect to do so moving forward.

Wholesale investors identified improved risk management as the main benefit of AI, cited by (76 per cent) of respondents, followed by the flexibility to adapt to changing market conditions (65 per cent). However, challenges remain: wholesale respondents cited the cost of implementation (64 per cent) and the complexity and interpretability of AI models (61 per cent) as the main obstacles to adoption.

“Among wholesale investors, we found a concern around the potential for AI-driven portfolio strategies to overshadow traditional models”, says Bernhard Langer, CIO, Quantitative Strategies at Invesco. “There is a sense that AI-driven models will be attractive to investors moving forward, particularly younger ones, meaning firms must adapt quickly.”

Institutional investors instead see accurate and timely insights (78 per cent) as the most compelling benefit of AI, followed by improved risk management (74 per cent) and increased efficiency and automation (68 per cent). Their primary concerns are complexity (78 per cent) and data quality and completeness (51 per cent).

“The key challenge for institutional investors is stakeholder management. Investors need to be able to explain and justify the use of AI models as their stakeholders are wary of ‘black box’ solutions”, says Langer. “The regulatory landscape surrounding the use of AI and decision accountability also remains ambiguous.”

The rise of natural language processing tools

Investors have embraced natural language processing (NLP) tools, which have been harnessed for a range of operations, such as summarising and digesting whitepapers, converting recommendations into accessible language for sales teams, and modifying communication tonality for different client groups.

NLP models have also been deployed in the investment process. (41 per cent) of respondents are using NLP for sentiment analytics, and around three-quarters (73 per cent) expect to do so in the future. Several investors reported searching online social channels to uncover prevailing market narratives around firms, measuring frequency of mentions and context, providing valuable insight for assessing risks and making short-term trading decisions.

APAC and North America lead the way

However, Invesco’s study found significant regional variations in attitudes towards AI and NLP, with investors in EMEA markedly more sceptical than their APAC and North America counterparts.

The majority (51 per cent) of EMEA investors believe that AI will still be less important than traditional analysis methods in ten years’ time, versus just (10 per cent) in North America and (7 per cent) in APAC. Conversely, just (4 per cent) of EMEA investors believe AI will supplant traditional analysis methods in that period, with much higher numbers observed in both North America (19 per cent) and APAC (20 per cent).

Moreover, North America and APAC investors are currently far more likely to be using AI in the investment process. APAC investors are twice as likely as EMEA investors to be using AI to identify patterns in market behaviour, and more than three times as likely to be using AI to adjust investment positions in real time. EMEA investors trail North America and APAC investors in each aspect of AI adoption. 

The growing systematic toolkit helps investors tame markets

Factor investing has historically been the cornerstone of systematic investing, but Invesco’s study reveals a far larger toolkit of systematic strategies that have helped investors navigate the key challenges of recent years.

Tools to decipher the macroeconomic environment have become especially important, and the ability of systematic approaches to help mitigate market risks was a key theme in this year’s study: the majority (63 per cent) of investors agreed that systematic strategies helped them manage market volatility in the past year. Moreover, nearly (60 per cent) of respondents said that the new higher inflation market regime was supportive of the systematic approach, with only (6 per cent) of institutional investors and (10 per cent) of wholesale investors disagreeing. 

For three-quarters of respondents, dynamic asset allocation has become a core component of their approach, helping them to rebalance and adjust their portfolios in response to the market environment. Systematic tools have helped investors identify and characterise the underlying macroeconomic regime, allowing them to make inferences about its impact on different asset classes, factors, regions, and sectors.

“Recent challenges have prompted investors to question how they navigate unexpected obstacles”, said Langer. “Respondents spoke of expanding beyond factors to better understand markets and identify when certain asset classes tend to outperform others”.

Bridging the ESG data gap

However, the usefulness of systematic approaches is not limited to the macroeconomic picture; respondents have commended systematic strategies as an antidote to the challenges around ESG, particularly bridging the ‘data gap’.

Invesco’s study found around two-thirds of respondents are using systematic strategies to incorporate ESG into their portfolios, and systematic tools have become useful for helping investors decode ESG variables and metrics, which can have a meaningful impact on performance.

Around half of respondents agree that systematic investing can help to apply ESG when data is scarce, and many noted that they were using systematic tools to reconcile the inconsistencies between ratings agencies and develop company scores from raw data.

“There is a low correlation between different ESG ratings agencies, which is of course a much less mature market than credit ratings. So we found investors were turning to systematic models to boost the quality of available data”, says Langer.

Beyond traditional asset classes and factors

Invesco’s study also found a growing consensus that the systematic approach can be applied across a broader range of asset classes than previously thought.

Systematic models are now well-embedded within fixed income and equities, but higher yields, coupled with a shift from quantitative easing, has meant that conventional macroeconomic considerations have returned to the fore in determining returns across various countries and sectors. This has boosted the appeal of systematic strategies for commodities and currencies: while only a quarter currently target commodities this way, (59 per cent) view this as a focal point moving forward.

The new macroeconomic environment has also prompted investors to rethink conventional wisdom about what constitutes a factor.

Notably, four in five respondents now recognise ‘growth’ as a standalone factor, challenging traditional academic views which contended that ‘growth’ was difficult to define precisely. Investors do not see growth as the opposite of value, or vice versa; rather, as distinct and in some cases complementary factors, as evidenced by the rise of nuanced and blended factors like ‘growth at a reasonable price’.