Five Reasons Why Sovereign Wealth Funds Should be in Focus Right Now

By Andrew Gilmore, Director of IR Intelligence, Nasdaq

Nasdaq IR Intelligence is typically viewed as long-term, low-revenue investors, many of whom often prefer to operate on market terms from the companies they invested in over the past year. The impact of the pandemic on global equities has meant that many sovereign wealth funds have had to rethink their previous “buy-and-hold” approach and instead use more conviction-based investment strategies. Below are five reasons why Nasdaq IR Intelligence believes companies should look to increase exposure to this group of investors in the coming months.

1. A weaker macro environment means less money to invest

The significant impact of the Covid pandemic on the global economy has meant that excess assets for sovereign wealth funds have likely become more sparse. Possible reasons for this would be the impact of lower oil demand on revenues for oil-dependent sovereign wealth funds in Scandinavia and the Middle East, or declining export revenues for non-oil-dependent sovereign wealth funds in Asia. In both cases, it is very likely that there will be less excess money available compared to a year ago. This means that sovereign wealth funds may be forced to sell assets to finance growing deficits, while at the same time being more targeted with their remaining investments. All of this indicates higher sales, and as such, IR teams would do well to classify their top SWF investors in the shareholder maintenance category.

Top SWFs by Internally Managed Assets

* Does not include shares held through external managers

** Source: Nasdaq IR Intelligence. Sample of customers from shareholder analysis (SWF invested $ 414 billion in 620 assets)

2. Pay the price for not being agile enough

The traditional buy and hold strategies used by many SWFs in the past will not have worked well in 2020. Many burned their fingers when the market first sold off in March, without taking advantage of government incentives -supported upswing in the months that followed. As a result, Nasdaq IR Intelligence observed that several SWFs became much more active in (often opportunistic) persuasion buying while selling investments in which they were previously stable, long-term holders. This is evident from the remarkable increase in threshold disclosure notifications made by government funds through the various regulators’ websites.

3. “Global Value” is currently in play

The majority of sovereign wealth funds have globally different portfolios, the regional weighting of which can easily be changed due to their centrally controlled administrative structures. In fact, there have been several news articles recently outlining the intentions of several funds to adjust their regional weights in light of the post-Covid market environment. Much has certainly been written about the segregation of values ​​between stock markets on both sides of the Atlantic as the effects of government stimulus packages on US stock markets have been more potent. This could mean that European companies are net recipients of state capital from funds known to pursue global value strategies. According to Nasdaq IR Intelligence, SWFs appear to have reduced their exposure to sectors that outperformed in 2020, such as technology and healthcare, while adding to sectors that underperformed in 2020, such as energy and consumer cyclicals.

Exposure of the SWF sector in late 2020

*Source: Nasdaq IR Intelligence. Sample of customers from shareholder analysis (SWF invested $ 414 billion in 620 assets) as of December 31, 2020

SWF% change in industry exposure in 2020

*Source: Nasdaq IR Intelligence. Sample of customers from shareholder analysis (SWF invested $ 414 billion in 620 assets) as of December 31, 2020

4. Increased use of external managers

2020 was a year in which the volume of mandate changes in the wealth management industry spiked, including some very large multi-billion dollar mutual funds that ended very long relationships with their outside managers as they sought lower fee structures and better overall returns. Similarly, many SWFs appeared to have shopped around in search of better deals and, in certain circumstances, decided to transfer more of their assets to active and passive outside managers. Firms will have seen this activity as large shifts in inventory within their investor base, caused not by buying or selling, but rather by a transfer of assets in connection with mandate changes.

5. Changes related to ESG settings

SWFs are typically not known for their exposure to the ESG level, but there are some notable trends emerging now that could be an indication of greater exposure in the future. There is a clear trend for several oil-dependent sovereign wealth funds to decarbonise their investment portfolios, while only maintaining energy investments that include the energy transition. In addition, some Middle Eastern sovereign wealth funds have recognized the need to diversify their economies away from oil as the global economy appears to become carbon neutral by the middle of this century. As this trend shows, another portfolio turnover should be expected again, which may offer some companies the opportunity to become recipients of newly allocated investment capital.

What does this mean for issuers?

SWFs whose equity positions were previously rated as stable and long-term are likely to be more volatile in the coming year as they become more active in stock picking to take advantage of changing market dynamics while dealing with the macro-economic factors that have a direct impact on the amount of money they have available for investment. For this reason, investor relations teams are advised to review their engagement strategies for this particular group of investors in order to provide a better understanding of the opportunities and risks of their SWF holders. In its capacity as a provider of shareholder analysis services to many of the largest publicly traded companies in the world, Nasdaq IR Intelligence has a unique perspective on global investor activity on a global basis. In this way, investor relations professionals can: Understand the extent of SWF ownership across their investor base; Understand the characteristics of how individual sovereign wealth funds invest and identify the right people at these institutions. For more information on how the Nasdaq advisory team can help you formulate an effective SWF engagement strategy, please contact your local Nasdaq representative.

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