Sovereign wealth funds shift from active to passive in wake of crisis, says State Street

GLOBAL - Sovereign wealth funds have adapted their investment strategy in the wake of the global financial crisis, increasing the size of their beta portfolios at the expense of alpha investments, State Street has said.

The shift from active to passive strategy has gone so far that it is now the preferred investment approach, a Middle Eastern sovereign wealth fund told the company.

In the paper, Current Issues in Official Sector Asset Management, the fund said that active management was employed unless a market or asset class did not offer opportunities for active management or did not reward such an approach.

It added: "Now we tend to see this investment decision the other way round. We conclude that assets should by default be managed passively unless evidence is clear that a given asset class has sufficient imperfections that active management is likely to be consistently rewarded."

John Nugée, senior managing director of State Street Global Advisors' (SSgA) official institutions group added: "Many have re-examined the performance of their funds, lessons they should draw from the market turmoil and the extra defenses they need in their approach."

"In many cases," he said, "the review confirmed that their guiding principles were correct, but a number have decided to make some important changes."

Nugée added: "The last few years have shaken many previously firmly held convictions and beliefs of sovereign asset holders about the markets, investment theory and the correct way to manage asset portfolios."

He said that despite this re-evaluation, the sovereign wealth funds were still in a good position to develop and prosper.

SSgA said that the funds were turning to emerging markets as a way of increasing growth, with these countries' debt offering an attractive alternatives to the low yields of traditional asset classes.

Some sovereign wealth funds in Europe have recently made changes to their investment strategy, with Norway's NOK2.9trn (€365bn) Pension Fund Global acquiring a 25% stake in the UK's Crown Estate portfolio in London's Regent Street, a prime retail district, investing for the first time in real estate.

The governor of Norges Bank Svein Gjerdrem, in charge of the sovereign fund's assets, has also called for investment guidelines to be relaxed, allowing for it to invest in private equity.