Sovereign wealth funds’ investment strategies cannot rely on asset allocation alone and can only be executed if they are in concert with market resilience, portfolio resilience and institutional capacity, the International Forum of Sovereign Wealth Funds stated in its January newsletter.
The IFSWF posed the question of how sovereign funds can become more resilient through long-term capital markets participation, particularly during times of economic volatility and geopolitical uncertainty. The IFSWF argued that market resilience, portfolio resilience and institutional capacity are not separate problems and that SWFs depend on all of those to succeed.
“Capital market development places sustained demands on institutions,” the IFSWF stated in the newsletter. “Funds that act as anchors or promoters must coordinate stakeholders, manage partnerships, and remain consistent over time. That requirement leads directly to the question of internal capacity.”
The IFSWF cited a paper from the Stanford Long-Term Investing Initiative that explored why long-term institutional investors struggle to translate strategic intent into sustained execution, even when objectives are clear and supported. The research noted that while changes to strategy or allocation move relatively quickly, governance arrangements, decision rights, skills, incentives and operating processes are much slower to adapt to the change.
The paper stated that institutional investors often use portfolio allocation as the primary focus for change, while less attention is paid to whether they can handle changes through their governance structures and operating model.
The IFSWF argued that when an SWF alters its strategic priorities under uncertain conditions, the governing body should test whether decision rights, skills, incentives and operating processes can support the execution of the strategy. It stated that even well-designed strategies “struggle to deliver consistent outcomes” without that alignment.
“When governing bodies authorize new strategic priorities without adjusting governance capacity and implementation resources, execution weakens,” the IFSWF stated. “Investment teams rely more heavily on external advisers. Internal learning slows. Operational risk increases. Strategy remains formally intact but loses traction in day-to-day decisionmaking.”
The IFSWF also stated that SWFs are key to injecting liquidity into capital markets, as well as anchoring listings and driving institutional reform.
“Their strategic engagement has positioned local exchanges as engines of diversification and regional economic transformation,” the newsletter stated.
The organization cited as an example several Middle East funds that buoyed their local stock markets amid global volatility, including capital markets in Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, all of which “demonstrated remarkable resilience and growth.”
Tags: IFSWF, International Forum of Sovereign Wealth Funds, Investment Strategy, sovereign wealth funds