LONDON Sovereign wealth funds are likely to enjoy returns of 5-7 percent this year as they boost investments in high-yielding assets such as infrastructure, property and emerging markets while keeping some in safe government debt, JP Morgan Asset Management says.
Patrick Thomson, global head of sovereigns at the asset manager, told Reuters in an interview on Thursday that volatility and the lack of liquidity in emerging markets remain a concern for the giant $4 trillion industry which invests windfall revenues for future generations.
"Most of them generated positive returns in 2011. Developed market fixed income will drive return assumptions and the average G3 10-year yield is 1.2 percent, so that's the floor. Low single digit returns would be the expectations for this year... sort of a 5-7 percent range," Thomson said.
"From what I can observe, there is a strong interest in infrastructure which has long cash flow and is good yielding assets... It's an asset only long-term investors can make the most of... My prediction is there will be many more deals in infrastructure, energy and emerging markets."
Despite huge expectations for returns given their fast-growing economies, emerging markets disappointed investors in 2011, with their benchmark equity index falling 20 percent and underperforming their developed counterparts.
"EM returned negative 10 percent. You are dealing with a very large pool of capital. Are they going to have liquidity that they need? The market is not deep enough compared with say U.S. Treasuries. That's definitely a concern," he said.
"Most of them tilted significantly towards EM. But they also understand GDP growth does not translate into asset returns. Certainly our advice is: emerging markets are volatile, they are less liquid, they are going to be prone to more volatility in terms of their returns. They understand this very well."
JP Morgan Asset Management manages $70 billion for 65 official sector clients, which include sovereign wealth funds and central banks.
Thomson said fixed income remains a core asset for sovereign wealth funds, which usually are launched with initial capital in the form of central banks' investments in overseas government bonds.
"They are going to put money in an efficient way. They are going to keep their portfolio diversified... You have Treasuries and you have government bonds... which are great drivers to direct investments, real estate and emerging markets."
Sovereign wealth funds are a fast-growing industry. Their total assets are expected to grow 8 percent this year to $5.2 trillion after a nine percent increase in 2011, according to a report from financial services representative body TheCityUK [ID:nL5E8D157U].
(Editing by John Stonestreet)