Demographics, tech and sustainability are key trends for sovereign wealth funds to watch: UBS-IMD white paper

SHIFTING demographics, the rise in technology and the increasing focus on sustainability are key macro trends that sovereign wealth funds (SWFs) should incorporate in their investment framework, according to a white paper co-authored by UBS and Swiss business university IMD.

Ageing may result in a redistribution of wealth across different generations, and may change consumption patterns, with needs for new products and services. This would require new investible projects in infrastructure, healthcare and wellness industries, as well as housing, said the paper, which presented key findings from the UBS-IMD Sovereign Investment Circle seminar in 2018.

The paper also noted that shifting demographics will impact other key economic variables. For instance, academic research suggests that in the US, equity values are correlated to demographic trends. As Baby Boomers age, they will likely move from investing in equities to selling equities to fund their retirement.

"All else being equal, this would exert pressure on equity multiples," the authors wrote.

Technology was also highlighted as a key area of consideration because of its disruptive nature. SWFs must be able to quickly spot disruptors and the disrupted, which can provide opportunities to generate extra returns or avoid permanent losses.

Companies and whole industries can also be put at risk by non-competitive dynamics coming from challenges outside the marketplace, for example in the area of cybercrime.

An important driver of sustainable strategies for companies will likely be climate change, which may have different effects across economies and sectors, and therefore across asset returns.

Commodity-based SWFs are the most exposed investors given that their source of wealth is oil, the underground asset that is being disrupted by climate change.

"We believe that diversifying climate change risk in the assets that they invest in global markets should become a key driver of their investment strategy in the future. But all investors should incorporate climate change in their investment framework," wrote the authors.

According to estimates from Carbon Delta, should companies become compliant with the 2015 Paris Agreement, about 7 per cent of listed companies are likely to lose 30 per cent of their market capitalisation as a result of additional regulatory costs, and about 5 per cent of the listed companies could see an upside of 30 per cent, they noted.