The second chapter of the IMF's most recent Global Financial Stability Report is about "Long-Term Investors and their Asset Allocation: Where Are They Now?" Here are a few of the main themes, with citations and footnotes eliminated throughout:
What are the big trends?
"To set the stage, the longer-term developments in global asset allocation show three main trends: (i) a gradual broadening of the distribution of assets across countries, implying a globalization of portfolios with a slowly declining home bias; (ii) a long-term decline in the share of assets held by pension funds and insurance companies in favor of asset management by investment companies; and (iii) the increasing importance of the official sector in global asset allocation through sovereign wealth funds and managers of international reserves."
Does the inflow of capital to emerging markets pose danger if there is a sudden stop or reversal?
"While the trend toward longer-term investment in emerging markets is likely to continue, shocks to
growth prospects or other drivers of private investment could lead to large investment reversals. The
structural trend of investing in emerging market assets accelerated following the crisis, driven mostly by relatively good economic and investment outcomes. Still, the sensitivity analysis in this chapter showed that a negative shock to growth prospects in emerging markets could potentially lead to flows out of emerging market equities and bonds. These flows could reach a scale similar to—or even larger than—the outflows these countries experienced during the financial crisis. ... Policymakers should prepare for the possibility of a pullback from their markets in order to mitigate the risk of potentially disruptive liquidity problems, especially if market depth may not be sufficient to avoid large price swings. Emerging market policymakers ... should prepare contingency plans to maintain liquidity in asset markets during periods of market turmoil, perhaps using sovereign asset managers as providers of liquidity as other investors exit, as some did during the crisis ...
Will countries start taking more risk with foreign exchange reserves?
"As heightened risk awareness and regulatory initiatives push private investors to hold “safer” assets, sovereign asset managers may take on some of the longer-term risks that private investors now avoid. ... However, global foreign exchange reserve holdings (excluding gold) have grown so fast in recent
years that their size for many countries now exceeds that needed for balance of payments and monetary purposes. ... Therefore, an increasing share of reserves could be available for potential investment in less liquid and longer-term risk assets. A new IMF estimate puts core reserves needed for balance of payments purposes in emerging market economies at $3.0–$4.4 trillion, leaving $1.0–$2.3 trillion potentially available to be invested beyond the traditional mandate of reserve managers, in a manner more like that of SWFs."
What about sovereign wealth funds?
"Sovereign wealth funds (SWFs) hold some $4.7 trillion in assets ... while international foreign exchange reserves amount to $10 trillion. Taken together, the value of assets in SWFs and foreign exchange reserves is equal to about one-fourth of the assets under management of private institutional investors. ..."