Dr Massimiliano Castelli, UBS Asset Management Head of Strategy and Advice for Global Sovereign Markets, analyzed the many opportunities and challenges that sovereign wealth funds face.

Key takeaways included:

  • Sovereign wealth funds (SWFs) and asset managers need to evolve to meet the numerous challenges posed by long-term megatrends playing out in the global economy;
  • The most pressing challenges include climate change, the prospect of lower returns, technological disruption, and 'slowbalisation' or the slowdown in globalization;
  • Meeting these challenges requires investors to evolve, with some feasible steps including learning new diversification concepts, considering alternative asset classes, including private markets;
  • Opportunities include taking a regionalized approach to asset allocation, focusing on regions or countries that are driving growth and bringing on new sectors, may be more useful at sustaining longer-term returns.

Starting with a review of the 2018 Sovereign Investment Circle, Dr Castelli detailed a whole list of megatrends emanating from the session, including climate change, technology and population ageing, that are at the top of investors' minds.

Dr Castelli went on to remind attendees that to build an investment framework that incorporates megatrends and drives the investment process, SWFs and asset managers need to evolve, and crucial evolutionary steps include:

  • learning to apply new diversification concepts across themes to reduce risks and capture opportunities;
  • considering alternative asset classes and finding opportunities in private markets;
  • creating the right mix of core and satellite strategies;
  • knowing how best to utilize passive investments, and
  • applying an interdisciplinary mindset to weigh and execute investment strategies.

Four key investor themes for 2019

Lower returns and higher uncertainty

But turning the focus to more immediate themes for investors in 2019, Dr Castelli firstly discussed how investors should adapt to the increasing likelihood of lower returns and higher uncertainty in the near future.

In Dr Castelli's analysis, SWFs are entering a new phase in their evolution as asset growth slows down and returns weaken. Adding in concerns like the outlook for China and prospects for higher protectionism, these institutions are facing high uncertainty over the medium-term pace of the global economy.

Ranking the probability of a recession in 2020 at 35%, Dr Castelli presented a base line estimate of a 40%1 chance of a moderate rise in global rates and equity prices. Amid a moderation in the global economy, Dr Castelli presented a series of portfolio scenarios, where greater levels of diversification have the potential to deliver more attractive returns. In all the scenarios considered, future returns are lower than they have been over the last decade when low yield, global liquidity and low volatility supported risky assets.

Climate change

Moving away from forecasts, Dr Castelli shifted the focus to the challenge of dealing with disruption, and focused on the potential for climate change to drastically shift the outlook for investors, economies and the world as a whole.

Focusing on the use of fossil fuels, Dr Castelli presented data showing rising demand for oil and gas, but the very real prospect of increased pressure on governments to pass tougher legislation on carbon emissions.

This can present huge issues for SWFs, who both manage oil wealth and who rely on oil revenues. SWFs, particularly those commodity-based, are considering on whether to reduce exposure to the oil and gas sector in order to reduce the overall exposure of the country to an accelerated climate change scenario.

The recent decision of Norway's SWF to reduce part of its exposure to the sector is an example of a trend that could accelerate over the next years.


Dr Castelli moved onto the subject of technology, pointing to trends like the growth of electric, autonomous and shared vehicles; the ongoing competition between the US and China in artificial intelligence; and the prospect of tech-driven unemployment.

The tech sector is one area where SWFs are increasingly prominent, investing approximately USD 13 billion in tech equity investments in 2018, which is a marked increase from ten years ago. Dr Castelli points out that this makes sense, particularly given the increasing prevalence of unicorn companies in the IT sector that have emerged in the past five years. Some of these unicorns will hit listed markets in 2019.

Technology has also become a new battleground in the geopolitical confrontation between US, Europe and China. Chinese companies and state-controlled investment vehicles face increasing scrutiny when investing in sensitive tech companies and this is unlikely to change in the future.


Dr Castelli also showed how the world has already entered a new phase of globalization called 'slowbalisation' and the main features of this new phase, such as anti-immigration policies, weakening global governance, higher barriers to global capital flows, and regionalism, becoming increasingly common.

In a slowbalisation scenario, emerging markets are perceived to be the main losers given their historically strong reliance on exports to sustain growth. However, Dr Castelli argued that this is not entirely true as emerging markets are shifting to a new growth model where domestic factors play a more prominent role.

The rise of the middle class in Asia and other emerging markets has created a new and still growing opportunity for domestically oriented companies. This is going to be the main driver of growth over the next decades in Asia and the more regional orientation of emerging markets is reflected into growing regional trade.

Dr Castelli argued that as 'slowbalisation' takes root, sovereign investors will probably need to re-think whether traditional global benchmarks are useful in portfolio construction. A regionalized approach to asset allocation, focusing on regions or countries that are driving growth and bringing on new sectors may be more useful at sustaining longer-term returns.

Bringing it all together

Summing up the session, Dr Castelli said that while the challenges to long-term investing are numerous, there are equally many opportunities.

During the Sovereign Investment Circle event, financial experts, academics, entrepreneurs and of course senior officials from leading SWFs explored these solutions.