Diversifying into Emerging Asset Classes

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Diversifying into Emerging Asset Classes

The Evolution of Public Asset Owners

June 2022

Policy objectives fundamentally shape public asset owners’ investment strategies. Still, market forces have catalyzed a redefinition of those policy objectives and a reexamination of the means for achieving them. One approach that many public asset owners are taking is increased diversification, as they explore a number of new asset classes in the search for yield. Their approach ranges along a continuum of bold to conservative, with SWFs expressing the greatest interest in entering new sectors, asset classes and markets early. 

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Digital assets are one area of interest, but none of the interviewees are yet seeking to invest in cryptocurrencies directly, given the lack of regulatory certainty and investment security. Instead, public asset owners look to indirect investments in the digital currency space. According to the public asset owners interviewed, digital assets and tokenization attract more interest. Many see tokenized assets as a powerful way to increase market liquidity, especially in alternative asset classes such as real estate. In particular, SWFs foresee an opportunity to shape the market. One fund official said: “We want to be leaders in this space – market makers who play a role in creating liquidity.”

Interview Perspectives

“We’re a public institution, handling public money; crypto is not yet at the stage where we can invest and feel it won’t potentially cause a scandal.”

 — Sovereign Wealth Fund

“There is a lot of interest in the underlying technology and the infrastructure surrounding cryptocurrencies.”

 — Public Pension Fund

 “Our economy is so focused on agriculture, it’s right to be looking at carbon as an asset class.”

— Public Institution

Among emerging sectors, the space economy is also generating excitement. Institutions with equity investments are familiar with companies such as SpaceX and their ecosystems. In the Middle East, in particular, public asset owners are interested in the broader sector, such as satellite telecommunications, where the prospect of returns is distant. One public institution, for example, has a joint venture with a satellite company and plans to invest significantly in building capacity for its country and region.

 

Several institutions in APAC also recognize carbon as an emerging asset class, with one suggesting it could become a core part of its portfolio. Carbon allowances or credits are a small and volatile market, currently worth around US$100 billion with an estimated US$250 billion in annual turnover1 and growing 20% annually as emissions trading systems and regulatory regimes mature.2 Moreover, investors look to carbon and its derivatives (futures and options) as a tool to hedge the climate risk in their portfolios.

1. McKinsey & Company: Putting carbon markets to work on the path to net zero, October 2021

2. McKinsey & Company: Putting carbon markets to work on the path to net zero, October 2021 


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