LONDON, Nov 23 (Reuters) - Sovereign wealth funds would benefit from adopting a pension fund-style investment strategy focusing on meeting future liabilities of the state, rather than outperforming market benchmarks, a new report said on Tuesday.
The paper, published by Nice-based EDHEC Risk Institute, found that a state fund should combine a performance-seeking portfolio invested in equities, an endowment-hedging component customised to meet the risk exposure and another that invests in bonds to hedge interest risks.
“This ... approach, which is yet another example of a fund separation theorem, can be seen as the extension to sovereign wealth funds of liability-driven investment strategies (LDI) recently developed in the pension fund industry,” the paper said.
LDI, which is becoming prominent in defined-benefit pension plans, aims to construct asset allocation strategies to meet liabilities, rather than to outperform a market benchmark.
The paper noted the optimal allocation strategy for the Norwegian SWF for example should involve a short position in oil/gas commodity futures, or a long position in stocks of companies such as airlines that benefit from a fall in oil prices, so as to diversify away some of the risk exposure in the country’s revenues. It added the allocation policy should also include a long position in inflation-linked securities to hedge some of the inflation uncertainty in future pension payments. (For related stories on sovereign funds, see [ID:nLDE68L0LF])
Reporting by Natsuko Waki; Editing by Ruth Pitchford
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