Sovereign wealth funds gaining from new uses of assets – report

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Securities lending, collateral transformation and optimal trading programs are on the agenda for sovereign wealth funds.Sophie Baker

Securities lending, collateral transformation and optimal trading programs are on the agenda for sovereign wealth funds, shows research by the International Forum of Sovereign Wealth Funds and State Street Corp.

The research, published Monday, is based on surveys and interviews of a number of IFSWF member organizations representing more than half of sovereign wealth funds worldwide. The research aimed to assess how long-term investors with large holdings of high-quality assets could benefit from securities lending, enhanced cash utilization and collateral transformation — participating in the temporary exchange of less liquid assets for more liquid assets.

One-half of respondents are engaged in securities lending and a further 10% said they were interested in initiating a program.

Regarding collateral transformation, 20% of SWFs responding to the survey said they now participate, but more than 50% said it was of high or moderate importance.

Respondents also were asked about trading costs and execution, with the results showing 80% do not directly use electronic or algorithmic trading tools. However, half of respondents think those tools’ use is of high importance, the research said. The findings suggest “that they remain engaged with their external managers on use of these tools to enhance trading efficiency and lower execution costs where possible,” the report said.

The research said institutional investors can also participate in margin optimization for over-the-counter securities — lending out assets to help other firms satisfy regulatory margin requirements.

“Sovereign wealth funds continue to be interested in ways to maximize their risk-adjusted returns over the long-term,” IFSWF CEO Duncan Bonfield said in a statement accompanying the research report. “Adopting new asset utilization practices can make investment execution more efficient and help them to boost returns without a significant impact on a fund’s risk profile.”

Chirag Patel, head of innovation and advisory solutions for Europe, Middle East and Africa at State Street Global Exchange, said in the same statement: “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 utilization techniques to improve yields from these portfolio holdings.”

IFSWF and State Street also identified five risks associated with securities lending activity: credit, market, operational, legal and reinvestment; and key considerations for a wealth fund when building a new securities lending program, such as an in-house vs. external arrangement. In the case of an in-house program, “one of the most critical components of the infrastructure would be a robust risk-management program that allows for dynamic real-time measurement and monitoring of asset and collateral mark-to-market valuations, as well as counterparty risks,” the research said.

State Street is one of IFSWF’s official research partners. The number of sovereign wealth funds involved in the research could not be learned immediately. Spokesmen could not be reached for comment.

The research is available for download on the IFSWF website.



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