Sovereign investors embrace active management amidst uncertainty

Our 2025 Global Sovereign Asset Management Study has uncovered a significant shift by sovereign wealth funds and central banks towards active management strategies across both equities and fixed income. "Today's fragmented investment landscape demands a level of tactical flexibility market-weighted passive strategies simply cannot provide," noted one APAC-based sovereign wealth fund.

This sentiment echoes across the sovereign investor community, and the data shows a clear direction: 52% of sovereign wealth funds anticipate increasing their active equity exposures over the next two years, while just 13% plan to increase exposure to passive equities. For fixed income, 47% plan to increase active and 14% plan to increase passive.

Strategic drivers beyond outperformance

Sovereign wealth funds are increasingly viewing active strategies as tools for navigating complexity and building portfolio resilience in an environment where traditional market assumptions are being challenged.

Key catalysts for this shift include:

• Index concentration risk: With a handful of large-cap technology companies now dominating index performance, institutions are questioning the diversification passive exposure is assumed to provide.
• Geopolitical fragmentation: The rise of regional economic blocs and shifting trade patterns is creating greater dispersion in market returns, a condition many sovereign wealth funds see as fertile ground for active strategies.
• Macro and political volatility: Broader uncertainty is diminishing confidence in one-size-fits-all beta exposure.
• Scenario resilience: The growing use of scenario testing is reshaping how these investors think about portfolio construction, with active management seen as providing greater flexibility to adjust to different potential outcomes.
• Alpha opportunities from market dispersion: Greater dispersion across markets, sectors, and regions is creating conditions where selective active management can add material value.

For many sovereign wealth funds, the decision is not framed as an either/or choice between active and passive, but rather as a strategic calibration based on market conditions, internal capabilities, and investment objectives. Most maintain significant allocations to both approaches, with the balance shifting in response to evolving market dynamics and institutional priorities.

Current allocation patterns

Across the sovereign wealth fund community, the shift towards greater active exposure is visible both in sentiment and in portfolio composition. Passive exposure remains important. However, the emphasis on strategic adaptability has recently come to the forefront. This shift is not about abandoning passive investing. Instead, it involves supplementing broad index exposure with active strategies that can target underrepresented sectors, geographies, or factors and underweight dominant (but potentially overvalued) exposures.

This recalibration reflects a recognition that true diversification today may require more deliberate construction than traditional passive benchmarks allow.

Expanding active strategies in fixed income

The trend towards active management extends beyond equities and into fixed income markets, reinforced by the current interest rate environment. As mentioned earlier, 47% of sovereign wealth funds plan to increase their active fixed income allocations over the next two years. This expected shift is driven by divergent central bank policies, persistent inflation pressures, fiscal sustainability concerns, and uneven liquidity conditions.

These factors are creating an environment where active duration management, credit selection, and tactical positioning can potentially add significant value. Hence, passive duration exposure is increasingly seen as inadequate, turning institutions towards active strategies to fine-tune duration profiles, dynamically adjust credit exposure, and selectively capture opportunities where market dislocations create pricing inefficiencies. This selective approach is particularly evident in how institutions are navigating emerging market exposures.

Active management as a portfolio construction decision

A noteworthy finding in this year's study is the expanding definition of "active management." For sovereign wealth funds, this now encompasses not just security selection within asset classes, but also strategic decisions around asset allocation, geographic exposure, and factor positioning.

This broader definition recognizes portfolio construction itself as a form of active management and may have even greater impact on returns than the traditional concept. As one Middle Eastern sovereign wealth fund put it: "The most consequential active decisions today involve how we position across geographies and sectors, not just which securities we select within them."

Heightened political and policy uncertainty is also prompting many institutions to reconsider their approach to geographic diversification. Some investors are now explicitly accounting for country risk in their valuation models, adjusting discount rates to reflect political and regulatory uncertainties that might not be fully captured in market prices.

Central banks: A foundation of active fixed income

Central banks have long maintained a strong active orientation in their fixed income portfolios. Our 2025 study shows an average of 66% of central bank fixed income allocations are actively managed, reflecting both historical practice and the specific objectives shaping central bank reserve management.

Fixed income has traditionally been where central banks have built deep internal expertise. Active management allows them to better navigate interest rate risk, mitigate credit downgrades, and respond to shifts in liquidity conditions. It also provides tools to enhance returns at the margin and within risk tolerance boundaries.

For equity allocations, central banks show a more balanced approach. This reflects in their forward-looking intentions to increase or maintain active equity management levels over the next two years and highlights their evaluation of the active-passive balance through the lens of their specific mandates, risk tolerances, and organizational capabilities.

Conclusion: Active management as a strategic capability

The evolution of active management among sovereign wealth funds and central banks reflects a broader strategic imperative: to build portfolios capable of navigating a more complex, fragmented, and volatile investment landscape.

Rather than viewing active management primarily as a vehicle for outperformance, institutions are increasingly positioning it as a strategic capability – one providing the flexibility, precision, and risk control needed to manage through structural uncertainty. Active management offers a potential path to more resilient portfolios.