Sovereign investors embrace active management, renew interest in China amid global fragmentation and policy uncertainty

Hong Kong, 14 July 2025 – Political and policy decisions have become core drivers of investment strategy, prompting sovereign investors to fundamentally reassess portfolio construction and risk management, according to the thirteenth annual Invesco Global Sovereign Asset Management Study.

While geopolitical tensions (88%) and inflation pressures (64%) remain dominant short-term risks for sovereign wealth funds (SWFs) and central banks, concern over excessive financial market volatility has surged, cited by 59% of respondents and up from 28% in 2024. Nearly 90% believe that geopolitical competition will be a key driver of volatility, while 85% expect protectionist policies to entrench persistent inflation across developed economies. Most notably, 62% of respondents now see deglobalization as a material threat to investment returns.

“The global political landscape has intensified since we launched this survey, adding complexity and uncertainty to investing decisions that used to be primarily influenced by economic factors and analysis,” said Martin Franc, Chief Executive Officer, Asia ex Japan at Invesco. “In these circumstances, especially for those investors with a long investment horizon, risk mitigation and portfolio resilience are paramount in building an investment programme that can perform through market cycles.”

Invesco’s study, a leading indicator on sovereign investor behaviour, draws on the insights from 141 senior investment professionals, including chief investment officers, heads of asset classes, and portfolio strategists, from 83 sovereign wealth funds and 58 central banks across the world, collectively managing $27 trillion in assets.*

Active strategies gain traction alongside foundational passive exposure

One of the key shifts in portfolio construction identified in the study is the greater use of active strategies by respondents. On average, SWFs maintain over 70% of their portfolios in active strategies across both fixed income and equities. The survey showed 52% of SWFs are planning to increase active equity exposures over the next two years with 47% doing the same with fixed income. This pivot is most pronounced among the largest institutions with 75% of SWFs managing over $100 billion having moved towards more active equity strategies over the past two years, compared to 43% of mid-sized and 36% of smaller funds.

While passive strategies continue to provide efficiency and scale benefits, active approaches are being used to address index concentration risks, navigate regional dispersion, and enhance scenario resilience in an increasingly fragmented landscape.

Recalibrating China and emerging markets

Emerging markets remain a strategic focus for SWFs, but priorities within the opportunity set are shifting and SWFs are taking a more selective approach with a clear resurgence of interest in China.

China is now the second highest priority for EM investment, with 59% respondents naming it either as a high or moderate priority. This marks a major shift from 2024 and may indicate that investors are segregating China exposure as a separate allocation from Emerging Markets more broadly. 

Most respondents (59%) expect to increase China allocations over the next five years, including 88% of APAC SWFs and 73% of North American SWFs. SWFs cite attractive local returns (71%), diversification benefits (63%), and increasing market access for foreign investors (45%) as drivers of China allocations. The most attractive sectors for investment in China were digital technology and software (89%), advanced manufacturing and automation (70%) and clean energy and green technology (70%). 

While optimism around China's innovation capabilities is widespread, views on the broader economic transition are mixed. Notably, while 78% of respondents believe China's technology and innovation sectors will become globally competitive, 48% believe China will successfully pivot from an export-led to a consumption-led economy.

“A consensus is growing that the opportunity set around China is unique and compelling, especially relating to the evolving technology ecosystem that is being developed in the country. Investors are becoming increasingly convinced of China’s innovative leadership in major technology segments and don’t want to be left behind,” said Martin Franc. “Built around sound policy settings and a competitive domestic market that allows innovative technologies to rapidly scale and gain competitive advantage, global investors are looking to their China investments as a pillar of their asset allocation to meet their portfolio goals.”

Fixed income reprioritised, and private credit takes on diversification role

Due to a combination of geopolitical shifts and interest rate normalisation, traditional portfolio construction models are being rethought, with many SWFs turning to more dynamic portfolio approaches that includes more fluid asset allocations, enhanced liquidity management, and greater use of alternatives. Within this landscape, fixed income has assumed a new importance within SWF portfolios, becoming the second most favoured asset class behind infrastructure. On a net basis, 24% of SWFs plan to increase their fixed income exposure over the next 12 months.

While a normalisation in interest rates and higher yields have contributed to this resurgence, fixed income has also taken on a broader role, both as a liquidity management tool and as a flexible source of return and portfolio resilience. As allocations to private markets increase, portfolios are becoming increasingly illiquid, making liquidity management a key strategic priority. As a result, nearly 60% of SWFs report using formalised liquidity frameworks, with segments of their fixed income portfolios specifically positioned to offset the illiquidity of their private markets exposures.

Private credit, meanwhile, continues to gain momentum among SWFs, with the proportion accessing the asset class through direct investments or co-investments rising from 30% in 2024 to 44% in 2025, and 50% of SWFs plan to increase allocations over the next year.

This growing interest reflects a broader rethinking of diversification, as traditional stock-bond correlations erode in a higher-rate, higher-inflation environment. Sovereign investors are turning to private credit for floating-rate exposure, customised deal structuring, and return profiles that are less correlated with public markets.

“In this fluid environment, fixed income and private markets exposure takes on a critical role in investor portfolios, with the focus on flexibility, liquidity, and floating-rate exposure along with a strategic approach to illiquid alternatives,” added Martin Franc. “While not a dramatic departure from prior years, portfolio adjustments have focused mostly on addressing duration risk and re-evaluating passive strategies, especially as the era of ultra-low interest rates comes to its definitive end.”

Central Bank Resilience and Gold’s Defensive Role

Central banks are reinforcing their reserve management frameworks in response to mounting geopolitical instability and fiscal uncertainty. Nearly two-thirds (64%) of central banks plan to increase their reserve holdings over the next two years, up from 53% in 2024, while 53% intend to further diversify their portfolios, up nominally from 2024 (52%).

Gold continues to play a critical role in this effort, with 47% of central banks expecting to expand their gold allocations over the next three years. Seen as a politically neutral store of value, gold is increasingly viewed as a strategic hedge against risks such as rising US debt levels, reserve weaponisation, and global fragmentation.

While diversification remains a long-term priority for most central banks, the prospect of an alternative anchor reserve currency to the US dollar is still a distant prospect. In 2024, 54% of central banks agreed that it would take more than twenty years for a credible alternative to the USD to emerge, if at all; in 2025, this figure was 78%. Respondents broadly agree that the global financial system remains heavily dollar-centric and is unlikely to meaningful change in the foreseeable future.

Digital assets, continued exploration

Digital assets are no longer seen as an outsider topic among institutional investors. This year’s study shows a small but notable increase in the number of SWFs that have made direct investments in digital assets, 11% compared to 7% in 2022. Allocations are most common in the Middle East (22%), APAC (18%) and North America (16%) compared to 0% in Europe, Latin America and Africa.

A surprise from the study was the growing interest by some SWFs in stablecoins, especially among SWFs in emerging markets. These are seen as easier to integrate than traditional cryptocurrencies due to their price stability and potential for real world application.