Bank of New York Mellon : Supporting sovereign wealth funds’ evolving needs

Written by: Hani Kablawi | CEO Global Asset Servicing and Chairman of EMEA, BNY Mellon

This week in London, senior managers of sovereign wealth funds and other public investors from around the world are attending BNY Mellon's eighth Sovereign Academy. We have been hosting these events on a semi-regular basis for over a decade. They are an intimate forum to discuss the key challenges and opportunities facing our sovereign fund clients.

According to the latest data from the Sovereign Wealth Fund Institute, sovereign funds now hold some $7 trillion of assets and span more than 50 countries. The world's largest sovereign fund is that of Norway while China has the most sovereign wealth assets, with funds including the China Investment Corporation, the Hong Kong Monetary Authority and the SAFE Investment Company. Around half the world's sovereign fund assets are concentrated in the Middle East - primarily in the UAE, Saudi Arabia, Kuwait and Qatar.

While sovereign funds vary significantly in size, shape, objectives and investment horizons, they typically have three things in common: they hold large pools of captive capital, they seek long-term returns and they safeguard wealth for future generations.

As assets under management have grown in recent years, many sovereign funds have looked to diversify into new asset classes and to build their own investment capabilities in-house. The low interest environment has encouraged them to look beyond their traditional focus of fixed income and public equities and towards new sectors, regions and asset classes. Private equity and hedge funds, and especially real estate and infrastructure, are now firmly on their investment menu. This greater diversification of assets and enhanced investment complexity presents a number of challenges for sovereign funds to which BNY Mellon and other asset servicing providers are responding.

The diversity and relative illiquidity of alternative asset classes makes their management, monitoring and accounting far more complex than fixed income and publicly listed equities. As sovereign funds increasingly make direct investment themselves, having the technological systems and platforms in place to deal with this complexity is becoming ever more crucial. Like all institutional investors, sovereign funds face the daily challenge of ensuring they have efficient and effective middle and back office operations. As assets have grown, there has been greater demand for more oversight by stakeholders from within government institutions. Sovereign funds also face greater transparency requirements as investment committees attempt to understand the drivers of performance across their different investments. As a result, managers of sovereign funds are seeking increasingly sophisticated data reporting and accounting solutions.

Sovereign funds' unique and often high profile positions means that security is absolutely at the top of their agendas. Our experience is that they are especially focused on having the highest levels of security and encryption. They also put great stock on the ownership of their asset servicing and solution providers; long-term financial stability is essential.

Sovereign funds will continue to evolve, along with their distinctive 'sovereign' nature that distinguishes them from other institutional investors. As they do so, the asset management and asset servicing providers that support them will continue to adapt to their changing needs.

The views expressed herein are those of the author only and may not reflect the views of BNY Mellon.