In a new survey entitled “What Asset-Liability Strategy for Sovereign Wealth Funds?” produced as part of a research chair supported by Deutsche Bank, Sovereign Wealth Fund (SWF) respondents have underlined the need for a change in investment practices to take into account both short-term constraints and liabilities. The survey presents the results of the Deutsche Bank research chair’s foundation paper – a dynamic asset-liability management (ALM) model developed to guide asset allocation and risk management decisions at the SWF level, and describes the results of a call for reaction on its theoretical and practical appeal for sovereign fund management.
In spite of the prevailing view that Sovereign Wealth Funds (SWFs) are not like other institutional investors and that they are pursuing a pure strategy of accumulation as a standalone, the EDHEC-Risk survey shows that the funds themselves consider that ALM techniques are appropriate for their financial management and that they have as a mission and constraint to take account of the risks of the States that set them up. The specific characteristic of their ALM is that it must cover not only the liability risk but also the contribution risk. It is noteworthy that SWFs believe that the asset management industry is not providing them with liability-driven investment (LDI) solutions that are adapted to their situation.
The survey received responses from sovereign wealth funds and public bodies responsible for managing sovereign investments. Most of the 27 respondents are SWFs from Asia-Pacific and Middle Eastern countries.
The survey period is from 23 February 2011 to 2 December 2011. Among the most salient results:
• 89% of the sovereign investment practitioners surveyed think that SWFs are subject to implicit short-term constraints (e.g. a limit on the maximum drawdown over a given period or minimum performance requirement due to peer comparison, loss aversion or sponsor risk).
• 92% of the respondents think that implicit liabilities should be taken into account. These liabilities correspond to the objectives that justified their creation.
• 70% of the respondents agree that the ALM framework provides SWFs with a better understanding of optimal investment policy and risk management practices.
• A majority of the respondents report a lack of dedicated solutions for ALM and risk management by SWFs.
A copy of the EDHEC-Risk Institute survey can be found here:
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