Geopolitical fragmentation and increased market volatility are driving Sovereign Wealth Funds (SWFs) out of passive and into active investment strategies, new research reveals.
Invesco’s Global Sovereign Asset Management Study finds more than half (52 per cent) of SWFs expect to increase their active equity exposures over the next two years. Current exposure to active strategies stands at 70 per cent across equities and fixed income.
Three-quarters of SWFs managing over USD100 billion say they will increase equity allocations to active strategies by 2027, which compares to 43 per cent of mid-sized funds and 36 per cent of smaller institutions.
Rod Ringrow, Head of Official Institutions at Invesco, says SWFs’ renewed emphasis on active management is not purely motivated by a search for alpha, but also as a means of managing geopolitical and market risk.
“SWFs are increasingly viewing active strategies as tools for navigating complexity and building portfolio resilience in an environment where traditional market assumptions are being challenged.”
He adds: “The rise of regional economic blocs and shifting trade patterns is creating greater dispersion in market returns, a condition that many SWFs see as fertile ground for active strategies.”
Indeed, one APAC-based SWF told Invesco that the end of the “geographical diversification free lunch” is prompting more selective allocation approaches.
The survey, which covers respondents holding a collective USD27 trillion in assets, finds that 88 per cent of SWFs say geopolitical tensions are the dominant short-term risk, while revealing surging concern over excessive financial market volatility.
In 2024’s survey 28 per cent of respondents said excessive financial market volatility was a key risk compared with 59 per cent this year.
Nearly 90 per cent of SWFs believe that geopolitical competition will be a key driver of volatility, while 85 per cent expect protectionist policies to entrench persistent inflation across developed economies.
Almost two-thirds (62 per cent) of respondents now see deglobalisation as a material threat to investment returns, which Ringrow says underscores a marked shift in the market narrative.
“While passive strategies continue to provide efficiency and scale benefits, particularly in highly liquid public markets, active approaches are being used to address index concentration risks, navigate regional dispersion and enhance scenario resilience in an increasingly fragmented landscape. At the same time, portfolio construction decisions such as asset class, geographic and factor tilts are increasingly viewed as core expressions of active management,” he says.
The research also identifies SWFs’ willingness to diversify portfolios away from traditional equity and fixed income holdings.
Infrastructure, private credit and market-neutral strategies are frequently cited as key components of a revised diversification toolkit, again driven by respondents’ concerns about geopolitical and market risk.
Ringrow says: “Diversification is no longer being approached as a static allocation between public equities and bonds, but as a dynamic process shaped by macroeconomic regime shifts. With inflation, interest rate volatility and geopolitical risk now more deeply embedded in market dynamics, respondents are building portfolios that can flex across cycles, incorporating a broader array of return sources and risk mitigators than in previous decades.”
