State Street Corporation and the International Forum of Sovereign Wealth Funds (IFSWF) today released new research on how sovereign wealth funds and institutional investors performed in their allocation throughout the COVID-19 pandemic.

The research reveals that many sovereign wealth funds and institutional investors have gradually deployed some of their accumulated cash and reduced fixed income positions to add exposure to risk assets, while financial markets rebounded during the pandemic. Institutional risk sentiment across asset classes has also broadly improved during the period up to March 2021, particularly for foreign exchange, commodity-sensitive assets and equity reallocation decisions.

Previous IFSWF and State Street research published in May 2020 suggested that institutional investor positioning was cautious at the start of 2020, with cash levels at their highest since the 2008-09 financial crisis. The latest dataset reveals investors have a more positive outlook for 2021, as they have started to redeploy capital and have reached a risk-neutral level across asset classes. Sovereign wealth funds largely achieved this position by increasing allocation to equities, taking advantage of cheaper prices amid 2020’s poor market performance.

The research also found no evidence of asset bubble behaviour. While discussions of asset bubbles remain topical and indicate heightened concern in the media, there is no evidence equity markets are currently in bubble territory. In fact, there is further room for institutional investors to add to positions in risk assets.

“Long-term investors have made risk-positive reallocation decisions across asset classes, reducing cash holdings and increasing equity exposure, while also continuing to diversify their portfolios by increasing allocations to private assets,” said Neill Clark, head of State Street Associates, Europe, Middle East and Africa (EMEA) at State Street . “Within equities, there was a marked uptick in institutional investor appetite for US listed stocks, however, emerging-market equity allocations were significantly scaled back.

The current macroeconomic environment, anticipated fiscal stimulus and portfolio positioning of institutional investors and sovereign wealth funds present reasons to be optimistic as we move further into 2021.”