Major sovereign wealth funds are reducing their exposure to listed equities and shifting their focus toward unlisted assets such as private equity, private credit, and infrastructure. As the artificial intelligence (AI) investment boom drives excessive concentration in a handful of large U.S. technology stocks, established investment strategies have wavered, prompting funds to move busily in search of new investment destinations.
According to the Financial Times (FT) and Bloomberg on Friday, an investment intentions survey of 90 sovereign wealth funds conducted by Invesco found that respondents planning to reduce their listed equity exposure outnumbered those planning to increase it by 17 percentage points.
This shift among sovereign wealth funds stems from the judgment that concentration risk in stock markets is growing. The combined weight of the top 10 stocks by market capitalization in the Standard & Poor’s (S&P) 500 index stands at 38 percent, nearly double the level of a decade ago.
“The preference for equities has visibly weakened this year,” said Josette Rizk, head of the Middle East and Africa region at Invesco. “Index-tracking passive strategies are now excessively exposed to a small number of mega-cap technology stocks, and many investors are re-examining whether broad market investment alone provides sufficient diversification.”
By contrast, infrastructure investment was cited as a favored destination, with respondents favoring expansion outnumbering those favoring reduction by 35 percentage points. Its appeal lies in the prospect of high returns, as well as the ability to build data centers domestically and reduce the risk of data being stored in third countries.
Private equity and private credit also saw expansion views prevail by 28 percentage points each. While redemption requests at private credit funds such as Blue Owl Capital and Apollo Global Management are increasing, sovereign wealth funds appear largely unconcerned about market soundness. The FT assessed that “large investors are moving away from listed equity markets concentrated in a few stocks and turning to private credit and infrastructure assets to invest in data centers and the energy infrastructure needed to operate them.”
In fact, Singapore’s sovereign wealth fund Temasek said that as of last year it invested 49 percent of its total portfolio in unlisted assets. The United Arab Emirates (UAE) sovereign wealth fund Mubadala allocates 59 percent of its total assets to private equity, infrastructure, and real estate. One Middle Eastern sovereign wealth fund told Invesco that “current AI investment opportunities can be best captured in the private credit and infrastructure sectors.”
Meanwhile, the survey also showed that the traditional diversification benefit of stocks and bonds is weakening. While bond prices had previously risen to offset losses when equities plunged, the two assets have increasingly moved together in recent times. Benjamin Jones, head of global research at Invesco, analyzed that “in an environment of inflation shocks, geopolitical risk, and intensifying stock market concentration, investors are re-examining existing assumptions about diversification and redesigning their portfolios to withstand a range of scenarios.”
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