SWFs Moving Into Illiquid Assets

Ashby Monk

Natsuko Waki of Reuters had an interesting article this morning detailing the results of a forthcoming MIT research paper on SWFs. According to the authors (Pulkit Sharma and Yoohoon Jeon), SWFs will be moving aggressively into real estate. Why, you ask, would they be interested in real estate now? Here’s Natsuko’s take:

“Sovereign funds, which manage an estimated $3 trillion of assets globally, have been diversifying their portfolios into property and other sectors as their risk appetite has been recovering after suffering double-digit losses during the crisis…SWFs have a long-term investment horizon and, unlike pension funds, have no or limited liabilities. Real estate as an asset class matches the long-term investment horizon…It is also a hedge against inflation, a portfolio diversifier and, as proved by our study, provides a hedge against the wealth source changes.”

I totally agree. And I’ve been arguing for quite some time that SWFs should move more forcefully into illiquid assets. And, on cue, it looks like some are finally taking real action:

  • The CPPIB and the Future Fund announced this morning that they are putting serious money to work in Australia’s real estate sector.
  • Scott Kalb of the KIC also said, “Right now is the time to go into private markets…Risk premiums on illiquid investments are becoming attractive…If I were a bond manager I would retire today…”
  • It also came to light recently that the  CIC was looking to add distressed real estate assets to their portfolio.

This is a good thing, as it capitalizes on SWFs’ inherent competitive advantage. Let the bottom feeding begin.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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