A deeper dive into optimized portfolios for Central Bank Reserves, Sovereign Wealth Funds and Public Pension Funds.

In a previous paper, we looked at optimized hypothetical portfolios for an illustrative Reserves Fund, Sovereign Wealth Fund and Public Pension Fund. The resulting model portfolios preserved the same asset volatility, duration and fixed income credit rating as their illustrative starting current portfolios, with some additional investor-specific constraints.

We identified “Three Critical Steps” from those optimizations: embracing less-liquid asset classes; extending credit portfolios; and going global. In terms of asset classes, the common theme was reweighting allocations in favor of private markets and various forms of securitized credit at the expense of core government bonds and equities.

In this paper, we take a closer look at those favored asset classes and discuss how investors might take those three critical steps. Would larger allocations, based on intermediate-term capital market assumptions, align with our current views on potential performance over the nearer term? And are there segments within these asset classes that we find particularly attractive?

Executive Summary

  • Portfolio optimizations in our previous paper revealed three common themes for all types of Official Institution: more private equity and debt, more securitized credit, a more global approach to fixed income.
  • In our view, the biggest opportunity in private equity continues to be for those willing and able to address the shortage of equity capital and exit liquidity in the current environment, via allocations to secondaries and co-investments.
  • In an environment of tight corporate credit spreads, we see more value opportunity in securitized credit, where there is slightly less liquidity and where the fundamental stories are complex and often more mixed.
  • As regional interest-rate policies and growth profiles diverge, the existing diversification to be had from markets with often very different credit profiles is further enhanced.
  • To a lesser extent, the optimizations also favored developed ex-U.S. equity and emerging markets debt: this globalization of portfolios aligns not only with our views on best practice for Official Institutions, but also with our views on the global economy following recent stimulus announcements in China; in any move away from U.S. equity, we would currently suggest less exposure to large caps but sustained exposure to U.S. small caps, value stocks and cyclical sectors.

Securitized Credit Offers Wider Spreads For Higher Quality

Mapping the Private Markets Journey for Family Offices

Source: FactSet. Data as of October 11, 2024.

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