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Sovereign wealth funds rotate from U.S. stocks to bonds

Kitco News

LONDON (Reuters) - Sovereign wealth funds pulled $4.1 billion from United States stocks in the third quarter, while adding to their U.S. bond holdings by the most in at least three years, data showed on Wednesday.

Around $4.5 billion was sucked into U.S. fixed income, with the bulk into short-duration instruments, according to the eVestment data on strategies managed by third-party fund managers.

The activity came ahead of the U.S. presidential election in November, which sparked volatility on Wall Street in the week prior to the vote as investors worried about the possibility of a contested outcome and as coronavirus cases soared globally.

The exodus from U.S. stocks, the most in at least three years, was likely not driven by the need for cash for governments at home, said Elliot Hentov, head of policy research at State Street Global Advisors, noting that recent debt issuance by sovereign funds’ governments was up massively and that they had a decent cash pile ahead of the coronavirus crisis.

“The U.S. election may partially have been a driver and expectations of an eventual non-U.S. recovery picking up, as well as the fact that markets had recovered a lot by Q3 and, if well timed, it was an opportune moment to sell,” Hentov said.

The U.S. stocks outflow, which contrasted with an inflow into non-U.S. equity for the second quarter in a row, was evidenced by Saudi Arabia’s Public Investment Fund cutting its exposure to North American equities by $3 billion in the third quarter, a regulatory filing showed.

“SWFs are becoming much more agile in response to the extreme fluctuations we have seen this year,” said Rod Ringrow, head of official institutions at asset manager Invesco. “I think these comments can be applied to the PIF as well, although we do not see any pressure for cash calls as of now, the PIF continues to lead the efforts to rebalance the (Saudi Arabian) economy away from reliance on hydro-carbon revenue, actively managing their portfolio to provide funds for investment makes sense.”

The move into U.S. fixed income contrasted with an outflow from non-U.S. fixed income by almost the same amount, the data showed.

The preference for U.S. bonds could be a desire to seek quasi-cash in anticipation of future liquidity needs, said Hentov.

Governments in several countries have drawn down savings from their funds in the months after the pandemic.

Around 24 withdrawals totalling about $137 billion had been made from sovereign funds globally in the wake of the pandemic and commodity price collapse, Global SWF said in September.

Across all forms of investment, U.S. allocations had grown in 11 out of a total of 15 sovereign funds which disclosed geographic allocation in their latest annual reports, noted Javier Capapé, director of the sovereign wealth research at IE Center for the Governance of Change.

That increase may be challenged by the possible continuation under Joe Biden’s administration of the economic protectionism started under Donald Trump’s presidency, said Capapé.

Editing by Chizu Nomiyama

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