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Recalculating Routes: Official Institutions Seek Guidance, Precision And Safety In Search Of New Investment Horizons

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 Corporation (NYSE: STT), “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. In a fluid and volatile investment environment where regulatory sands are continually shifting, official institutions are required to be more adaptable than ever to new risks and new opportunities.

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. Among those surveyed:

  • 73% say keeping up with the changes in regulation across global markets is a challenge
  • 51% 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% saying it’s a challenge to combine different risk measures across asset classes
  • 38% cite higher interest rates as a hurdle
  • 37% are most concerned about emerging market volatility
  • 35% are concerned about the cost of execution going up given collateral issues and additional reporting requirements
  • 25% say their biggest investment challenge is managing the complexity associated with alternative investments

“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.”

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