Major sovereign wealth funds are reducing their exposure to listed equities and shifting their focus toward private assets such as private equity funds (PEF), private debt funds (PDF), and infrastructure. As the artificial intelligence (AI) investment boom has left the U.S. stock market excessively concentrated in a handful of large technology stocks, existing investment strategies have been shaken, prompting these funds to scramble for new opportunities.
According to the Financial Times (FT) and Bloomberg on Tuesday, in an investment intention survey of 90 sovereign wealth funds conducted by Invesco, respondents who said they would reduce their listed equity exposure outnumbered those who would increase it by 17 percentage points.
This shift among sovereign wealth funds stems from the judgment that concentration risk in the stock market is growing. The share of the top 10 stocks by market capitalization in the Standard & Poor's (S&P) 500 index stands at 38 percent, nearly doubling over the past decade.
"This year, the preference for equities has weakened noticeably," said Josette Rizk, head of the Middle East and Africa region at Invesco. "Index-tracking passive strategies are now excessively exposed to a small number of mega-cap technology stocks, and many investors are re-examining whether broad market investment alone is providing sufficient diversification."
By contrast, infrastructure investment was cited as a highly favored destination, with those favoring expansion outnumbering those favoring reduction by 35 percentage points. Its appeal lies in the prospect of high investment returns, as well as the ability to build data centers domestically to reduce the risk of data being stored in third countries.
Private equity and private debt also drew expansion sentiment, leading by 28 percentage points each. While redemption requests at private debt funds such as Blue Owl Capital and Apollo Global Management have been increasing, sovereign wealth funds appear not to be greatly concerned about market soundness. The FT noted that "large investors are turning to private debt and infrastructure assets to move away from listed stock markets concentrated in a few stocks and to invest in data centers and the energy infrastructure needed to operate them."
In fact, Singapore's sovereign wealth fund Temasek disclosed that as of last year, 49 percent of its entire portfolio was invested in private assets. The United Arab Emirates (UAE) sovereign wealth fund Mubadala allocates 59 percent of its total assets to private equity, infrastructure, and real estate. One Middle Eastern sovereign wealth fund told Invesco that "current AI investment opportunities can best be captured in the private debt and infrastructure sectors."
Meanwhile, the survey also revealed that the traditional diversification benefit between stocks and bonds is weakening. In the past, when stock markets plunged sharply, bond prices rose and served to offset losses, but recently the two assets have increasingly been moving together. "In an environment of inflation shocks, geopolitical risks, and intensifying stock market concentration, investors are re-examining their existing assumptions about diversification and redesigning their portfolios in a direction that can withstand various scenarios," said Benjamin Jones, head of global research at Invesco.
