Increasing numbers of sovereign wealth funds (SWF) are turning to securities lending activities and other asset utilisation practices in order to maximise returns, according to new research.
The report, based off of a survey conducted by State Street, assessed how long-term investors with large holdings of high quality assets are primed to leverage and benefit from securities lending, and collateral transformation.
“Sovereign wealth funds continue to be interested in ways to maximise their risk-adjusted returns over the long term. Adopting new asset utilisation practices can make investment execution more efficient and help them to boost returns without a significant impact on a fund’s risk profile,” said Duncan Bonfield, CEO, International Forum of Sovereign Wealth Funds (IFSWF).
The survey found half of respondents are currently engaged in securities lending, and a further 10% expressed their interest in initiating a lending programme.
Only 20% of respondents said they use collateral transformation in their investment activities, but more than 50% deem the practice as being of high or moderate importance.
“Historically, sovereign wealth funds have held large allocations to passive index strategies within fixed income and equity markets. However, in the current low-rate environment this has driven appetite for the use of asset utilisation techniques to improve yields from these portfolio holdings,” said Chirag Patel, head of innovation and advisory solutions, EMEA, State Street Global Exchange.
State Street also found there has a rapid shift towards wider use of new technologies that are transforming the landscape of trading venues.
Half of SWFs survey said they rate electronic and algorithmic trading tools highly, suggesting they are increasingly focusing on optimal execution to reduce trading costs and improve portfolio efficiencies.
“The low interest rate environment over the last several years has accelerated the adoption of novel asset utilisation and execution techniques and we have seen that SWFs have been benefitting from this,” added Patel.