Sovereign investors recalibrate for a transformed investment landscape

Amid an unpredictable macro environment, sovereign investors are reassessing portfolio frameworks. Traditional models are being challenged, prompting strategic adaptations in asset allocation, risk management, and diversification. As part of our 2025 Global Sovereign Asset Management Study, our experts explore the significant shift in how sovereign wealth funds and central banks view the investment environment against the backdrop of the Trump administration's tariff policies and broader fragmentation trends.

Respondents increasingly view the combination of geopolitical tensions, interest rate unpredictability, and evolving asset relationships as longer-term structural conditions rather than temporary disruptions. As a result, political and policy decisions have moved from peripheral concerns to central drivers of investment strategy, with previously considered tail risks increasingly incorporated into planning scenarios. This fundamental reassessment is driving meaningful adjustments to strategic asset allocation, risk management, and portfolio construction across both sovereign wealth funds and central banks.

A geopolitical debt crisis

Our 2025 study showed significantly intensified concerns about market volatility. Geopolitical tensions (cited by 88% of those surveyed) and inflation pressures (64%) continue to dominate near-term risk assessments, but excessive financial market volatility has also emerged as a major concern (59%), substantially increasing from 2024, as shown in the chart below. The long-term outlook shows high levels of anxiety about global fragmentation (76%), climate impacts (63%), and sovereign debt sustainability (57%), with the latter showing the most significant year-over-year increase.

"We're observing unsustainable debt accumulation across both developed and emerging economies, with growth primarily driven by consumption and government expenditure rather than innovation," noted an African sovereign wealth fund.

While these concerns were mostly expressed about the US, respondents also pointed to recent European developments such as Germany's debt brake relaxation and the EU's ambitious infrastructure and defense spending commitments.

Geopolitical issues top the list of concerns for both the next year and the next decade

Risks to global economic growth in the next year (top) and the next 10 years (bottom) cited by central banks and sovereign wealth funds.

What do you see as the major risks to global economic growth in the next year? What do you see as the major risks to global economic growth in the next 10 years? Sample size: 136

Remaining measured amid political tensions

Still, sovereign wealth funds and central banks have generally approached portfolio adjustments with restraint. Respondents are more likely to have implemented targeted modifications, with particular attention to their American market exposure, over wholesale realignments. 

Rather than reacting impulsively, they noted they were positioning for maximum flexibility to adapt as the situation evolves. “Creating a 'Trump-resistant' portfolio isn't realistic, nor will we overreact to administrative rhetoric," remarked one North American sovereign wealth fund "We're focusing on substantive policy implementation rather than day to day political messaging."

The end of the low-interest rate era

Many respondents believe the current political and economic realignment marks the end of the low interest rates. The majority (74%) expect medium-term interest rates and bond yields to stabilize in the mid-single digit range, up slightly from 71% in 2024, as shown in the chart below. Only 11% foresee a return to ultra-low or negative rates, pointing to a broad reassessment of the monetary environment.

Few expect a return to very low interest rates

The long-term outlook for interest rates and bond yields from central banks and sovereign wealth funds

This normalised rate environment represents a generational shift for portfolio managers. Sovereign institutions are subsequently updating their capital market assumptions, risk models, and strategic asset allocations to accommodate this new reality. Central banks predominantly anticipate a more flexible Federal Reserve (50%). However, sovereign wealth funds show more divided expectations.

Structural challenges to portfolio diversification

The combination of geopolitical shifts and interest rate normalisation has also prompted a structural reassessment of diversification. In today’s higher-inflation, higher-rate environment, equities and bonds are increasingly correlated, diminishing fixed income’s effectiveness as a diversification tool.

These shifts are driving a broader re-evaluation of how diversification is achieved. Infrastructure, private credit, and market-neutral strategies are frequently cited as key components for revising the toolkit. One APAC-based sovereign wealth fund noted, “Traditional government bonds no longer provide effective equity risk protection. We've pivoted toward private credit markets and non-directional strategies to build more robust portfolios.”

With these factors now more deeply embedded in market dynamics, respondents are building portfolios that can flex across cycles, incorporating a broader array of return sources and risk mitigators than in previous decades.

Rethinking fixed income

As interest rates have normalised and asset correlations have shifted, sovereign wealth funds are reassessing the role of fixed income in their portfolios, deploying allocations in more dynamic and multifaceted ways.

The 2025 study shows 24% of sovereign wealth funds (on a net basis) plan to increase their fixed income exposure, making it the second most favored asset class behind infrastructure, as shown in the chart below. This renewed interest reflects two primary drivers: the restoration of meaningful yield and the broader redefinition of fixed income's role.

Higher base rates have restored fixed income's return potential after years of compression. "The credit spectrum currently offers more attractive risk-adjusted returns than public equity markets," suggested one Middle Eastern sovereign wealth fund.

These findings point to a new role for fixed income which is less about traditional risk-off positioning, and more about strategic adaptability. Sovereign institutions are not simply returning to fixed income; they are redesigning its function in response to changing market structures, portfolio liquidity needs, and recalibrated risk-return assumptions.

Infrastructure and fixed income top the list of assets favored by sovereign wealth funds

Net allocation intentions to increase or decrease in the last five years, cited by sovereign wealth funds

For each asset class, how do you expect your allocation to change over the next 12 months? Sample size: 70

Private credit becomes a pillar of strategy

Alongside fixed income, private credit has emerged as a key focus for sovereign wealth funds seeking alternative sources of income and resilience. It is becoming increasingly viewed as a strategic pillar offering higher yields, bespoke structuring, and lower volatility and correlation to public markets.

This evolution is driven by both macro conditions and structural opportunity. Higher base rates, persistent inflation, and less reliable bond-equity diversification have all increased the appeal. Its floating-rate nature offers protection in a rising-rate environment, while customised deal structures provide better alignment with investor objectives and risk tolerance.

Other respondents emphasised the organisational transformation underpinning this shift. As sovereign wealth funds continue to adapt to a more complex and fragmented investment landscape, private credit is increasingly becoming embedded within long-term strategic asset allocation frameworks. It is no longer viewed as a supplementary or opportunistic asset class, but as a core building block to deliver stability, less correlated returns, and greater portfolio control.

Synthesising for 2025: a fundamental reorientation

The 2025 study reveals a growing consensus among sovereign wealth funds and central banks that the current landscape is not a temporary disruption, but a structural break from the post-crisis era. This reassessment is prompting meaningful changes in how institutions think about risk, return, and resilience. Download our full study for a deeper dive on this topic as well as four other key themes articulated by sovereign investors.