State Street reveals SWFs are adopting new asset utilisation techniques
20 November 2018 London
Image: Shutterstock
More sovereign wealth funds are engaging in securities lending in the current low-rate environment, according to a research paper from State Street and the International Forum of Sovereign Wealth Funds (IFSWF).
In the paper, entitled Enhanced Asset Utilisation to Improve Portfolio Returns, State Street surveyed and interviewed a number of the IFSWF’s member organisations, which represent over half of the world’s sovereign wealth funds (SWFs).
According to the paper, half of the IFSWF’s member organisations surveyed said they are currently engaged in securities lending.
The research assessed how these long-term investors with large holdings of high-quality assets are well-placed to leverage and benefit from asset utilisation practices, such as securities lending, enhanced cash utilisation and collateral transformation.
According to the research, 10 percent expressed their interest in initiating a lending programme at their institution.
Additionally, only 20 percent currently use collateral transformation in their investment activities, but more than 50 percent deem it as being of high or moderate importance.
In the current market, incipient regulatory requirements such as the Markets in Financial Instruments Directive are driving a rapid shift towards a wider use of new technologies, transforming the landscape of trading venues, State Street said.
Whilst most respondents (80 percent) do not directly use electronic or algorithmic trading tools, half rated their use being of high importance.
State Street said this finding suggests that SWFs “will increasingly focus on optimal execution to reduce trading costs and improve portfolio efficiencies”.
Chirag Patel, head of innovation and advisory solutions for Europe, Middle East and Africa at State Street Global Exchange, said: “Historically, sovereign wealth funds have held large allocations to passive index strategies within fixed income and equity markets.”
She added: “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. There has also been an increasing transformation amongst trading venues through the rapid advances in both electronic and algorithmic trading, resulting in cost-cutting and enhanced trading efficiency.
“SWFs continue to look for new opportunities to increase yields and improve efficiencies within their investment processes. 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.”
Duncan Bonfield, CEO of IFSWF, said “SWFs continue to be interested in ways to maximise their risk-adjusted returns over the long term.”
He added: “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.”
In the paper, entitled Enhanced Asset Utilisation to Improve Portfolio Returns, State Street surveyed and interviewed a number of the IFSWF’s member organisations, which represent over half of the world’s sovereign wealth funds (SWFs).
According to the paper, half of the IFSWF’s member organisations surveyed said they are currently engaged in securities lending.
The research assessed how these long-term investors with large holdings of high-quality assets are well-placed to leverage and benefit from asset utilisation practices, such as securities lending, enhanced cash utilisation and collateral transformation.
According to the research, 10 percent expressed their interest in initiating a lending programme at their institution.
Additionally, only 20 percent currently use collateral transformation in their investment activities, but more than 50 percent deem it as being of high or moderate importance.
In the current market, incipient regulatory requirements such as the Markets in Financial Instruments Directive are driving a rapid shift towards a wider use of new technologies, transforming the landscape of trading venues, State Street said.
Whilst most respondents (80 percent) do not directly use electronic or algorithmic trading tools, half rated their use being of high importance.
State Street said this finding suggests that SWFs “will increasingly focus on optimal execution to reduce trading costs and improve portfolio efficiencies”.
Chirag Patel, head of innovation and advisory solutions for Europe, Middle East and Africa at State Street Global Exchange, said: “Historically, sovereign wealth funds have held large allocations to passive index strategies within fixed income and equity markets.”
She added: “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. There has also been an increasing transformation amongst trading venues through the rapid advances in both electronic and algorithmic trading, resulting in cost-cutting and enhanced trading efficiency.
“SWFs continue to look for new opportunities to increase yields and improve efficiencies within their investment processes. 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.”
Duncan Bonfield, CEO of IFSWF, said “SWFs continue to be interested in ways to maximise their risk-adjusted returns over the long term.”
He added: “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.”
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