Official institutions are looking to new markets and a broader range of assets as they search for greater returns, according to a new report by State Street.
In, “New Horizons for Official Institutions,” more than sixty senior executives at official institutions, defined as central banks, sovereign wealth funds (SWF) and public pension reserve funds, were surveyed to explore the opportunities and challenges they face today and in the future.
Despite concerns about the challenges associated with new markets and asset types, 80 percent of official institutions surveyed expect to increase their exposure to new markets, and, where they have the appropriate mandate, to alternative assets such as hedge funds, private equity, real estate and infrastructure. This move into new asset types is creating new levels of portfolio complexity and within this uncharted territory are fresh challenges, said the report.
Among those surveyed, 51 percent say the biggest challenge is correctly measuring and monitoring the amount of currency risk they are taking; this emerged as the biggest concern for APAC respondents with 44 percent saying it’s a challenge to combine different risk measures across asset classes.
Other hurdles cited were higher interest rates, emerging market volatility, and the rising cost of execution, given collateral issues and additional reporting requirements.
“Official institutions are at different stages in terms of how and where they can invest, but it is clear that those institutions with a more flexible investment mandate are recalculating their approach and looking to new markets and asset classes as they search for yield,” said Joe Antonellis, vice chairman of State Street.
“The resulting portfolio diversity presents fresh challenges, and official institutions will need the right teams and supporting solutions to manage these strategies.”
Official institutions need to measure the moving targets of risk, complexity and efficiency and be more adaptable than ever. Overall, managing risk was the biggest challenge for survey respondents with market risk cited as a major concern for 86 percent and operational risk just behind at 73 percent.
But confronting these risks requires greater investment. Almost two thirds of respondents (60 percent) plan to increase investment in their risk management systems and processes over the next two years and 32 percent of respondents report difficulties hiring employees with risk, compliance and reporting skills.
“To meet the challenges identified in this research, official institutions must create an efficient, streamlined, yet resilient, operating model,” said Rod Ringrow, senior managing director and head of official institutions for Europe, Middle East and Africa region at State Street.
“This means reducing costs while not compromising on standards, finding the right combination of people, process and technology to support investment needs and operational challenges, and using data to generate insights that support better-informed investment decisions. Across all these areas, institutions must retain the necessary rigor in their decision-making and remain truly accountable under ever-greater scrutiny.”
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