We live in an uncertain world. We’re dealing with an unprecedented breadth and speed of change in technology, demography, globalisation, environment, and, not least of all, social norms. These shifts have seen increasing failure rates for corporations. So, what is the impact on asset owners?
Let’s start by defining what we mean by an asset owner. We believe there are five qualifying characteristics. An asset owner:
- works directly for a defined group of beneficiaries/savers/investors as the manager of their assets in a fiduciary capacity (upholding loyalty and prudence) under delegated responsibility
- works with a sponsoring entity, usually a government, part of government, a company or a not-for-profit.
- works within explicit law and possesses an implicit societal license to operate because of its societal trust and legitimacy
- delivers mission-specific outcomes to beneficiaries and stakeholders in the form of various payments or benefits into the future
- employs a business model that combines a governance budget (essentially resources and processes) and a risk budget (reflecting the mix of financial assets that delivers on the mission).
So far, asset owners have been protected from existential risks. Many are not-for-profit organisations and they have enjoyed secure sponsorship which has, to date, guaranteed their existence; safety nets have prevented them from going out of business.
However, we believe that asset owners are becoming increasingly exposed to the Great Acceleration. This is a term that was first used in a working group at a 2005 Dahlem Conference on the history of the human-environment relationship and subsequently popularised in Robert Colvile’s book ‘The Great Acceleration’. Colvile characterises this as “the ceaseless advance of technology and our own fundamental appetite for novelty and convenience” speeding up every aspect of daily life.
There are major implications for asset owners. Covenants are becoming weaker year by year, as economic realities bite and pension liabilities mature and everlasting sponsorship is no longer a sure thing. The ‘fittest’ organisations in this race for survival will be those that have both understood the implications of the Great Acceleration and have the skillset and mindset to act.
Pursuing best practice in not only the investment model—but also in an organisation’s people and business models—has become a matter of survival in the Australian market, given these global forces for change and the calls for consolidation in our industry. The current low return environment, where edge is vital to investment performance, just confirms how crucial and immediate the need for such a focus is. There is an overarching need for asset owners to better understand the world in which they operate, if they are to manage risk, exploit opportunities and thrive through the Great Acceleration.
In this context, Willis Towers Watson’s Thinking Ahead Institute has recently released two pieces of research. Our inaugural Asset Owner 100 survey, sets a clear definition of the term asset owner – institutions that manage collective savings of over US$50tn under discretionary and fiduciary responsibility. The top 100 includes nine Australian funds, the second highest number of funds after the US. Their size and their influence make these asset owners too important to fail in their mission. The second research paper, ‘The asset owner of tomorrow’, addresses the key challenges faced by asset owners and how these trends might ultimately shape their journey in the next five to ten years. We see four big shifts in response to the Great Acceleration in coming years.
Shifting common approaches to professionalism
Asset owners must shift from a focus on performance towards professional accomplishments, acknowledging their wider public duties as well as taking a longer-term view of their capital allocation and ownership responsibilities.
For professionalism to be institutionalised, professional standards must be maintained in all parts of the organisation, starting with boards and progressing through executive leadership to all levels. Asset owners often have two natural advantages in advancing a stronger-principled and more professional industry: many work to a profit-for-members business model; and most are close to being a principal rather than an agent in status and alignment. These attributes enable a longer-term orientation to capital allocation and to ownership rights and responsibilities.
Asset owners should be aligned to societal interests. Economic growth and societal well-being are positive by-products of healthy investment organisations. This thinking aligns with the mantra that a focus on the interests of stakeholders is likely to be a marker of sustainable organisations.
Increased adoption of systems and automation to enhance decision-making
Successful asset owners will become more efficient in handling big data and marshalling computer-based technology alongside human technology in order to create opportunities for networked thinking.
Current decision-making in investing has limitations. All asset owners take their decisions through a combination of human input (we refer to this as ‘social technology’) and systems/support (we refer to this as ‘physical technology’). Achieving balance and efficiency in this combination is hard.
Research has revealed biases that are present in all investment decision-making settings. These are more numerous and deeply-embedded than are readily recognised, and lead to behavioural anomalies including over-confidence, sub-conscious bias, framing and agency pressures.
A likely trend is a movement from ad-hoc human-judgment processes to increased reliance on rules-driven processes that are less prone to human bias and more governance-friendly. This has the added benefits of creating transparency to explain how a strategy has “skill” (is expected to add value), and greater ease of implementation.
Artificial intelligence and machine learning will enhance the trend to automation as investors get more efficient in handling and parsing big data sources and integrating technology more fully in the investment process. Successful asset owners will marshal technology alongside human talent. In short, the roles of humans are enhanced by technology.
Using culture and diversity to further evolve the people model
Asset owners have typically not enjoyed a significant history of strong leadership, which has reduced their ability to cultivate an effective decision-making culture as a competitive advantage. In particular there is a need for greater diversity which includes ‘identity diversity’, but goes beyond that into ‘cognitive diversity’ as well.
The case for greater diversity in investment organisations is strong both in terms of business case context and better culture.
Diverse groups of people bring more and different ways of approaching difficult problems and better ways of solving them. With the complex problems faced in investing, limited diversity—where everyone thinks alike—produces roadblocks. With greater diversity, roadblocks can be circumvented.
Diversity is not completed without inclusion. The combination is critical and organisations that focus only on creating balance in workforce composition by numbers miss the real business case where inclusiveness delivers the benefits of increased opportunity and cognitive diversity.
The investment industry has had difficulties with the pipeline of women due to hiring preferences for STEM (science, technology, engineering and maths) graduates where women do not have full representation in the aggregate population. Gender diversity in the investment industry varies by country with some of the Asian countries exhibiting the best balance, often because they have better balance in STEM graduates.
Rethinking the investment model
The investment landscape mapped into the
future is more complex than any model can describe – hence the need to develop beliefs, to employ a variety of risk-return drivers among asset classes, factors, themes and skill, and to target specific outcomes. Investment is increasingly a collective effort, so how we work in groups to build beliefs is critical. The shift towards a collective belief system and an integrated portfolio takes time, empathy and strong process.
The critical mix between public and private markets will continue to evolve. The natural supply of public markets from corporations accessing capital to grow their business has fallen away. It becomes natural for more expansion capital to be based on private markets in future. The asset owner of tomorrow is more geared up to get closer to target companies and can use their relationships productively. Private investing as a category will expand – this includes investment in peer-to-peer and crowdfunding models.
All situations for asset owners are different and the art to their future success will be understanding and evolving best practice principles and applying them to unique circumstances. As a result, there is an overarching need for them to understand the world in which they operate through a model that connects all the dots.
The global picture
The Asset Owner of Tomorrow research builds on the peer group study released in 2017, ‘Smart Leadership, Sound Followership’, which compared the practices of a group of 15 influential asset owners. That study came up with five key findings:
- By developing strong internal teams, these asset owners have become very good at what they do. However, while they have one foot in the future, they have a number of issues where they have not reached their potential.
- Their decision-making has weaknesses. There are numerous and deeply-embedded biases that are present in all investment decision-making and these asset owners are not immune from these. They have opportunities to use diversity more effectively, and to develop better processes and use of technology to reduce the impact of such biases.
- Their long-horizon investing and sustainability practices lack commitment. Opportunities are being missed in the overlapping areas of sustainability, ESG, stewardship and long-horizon investing, with mindset more of an issue than available skillsets.
- Their boards struggle with acting strategically. The boards are strong in interpreting their funds’ mandates and in ensuring executive accountability, but weaker in strategic dialogue with their executive teams. Asset owners would be much better placed to meet the challenges of the future with more strategically-minded boards.
- They are evolving their resourcing model between insourcing and outsourcing. This is still a work in progress and they need to improve their grasp of how to optimise these components in the value chain of outside providers and internal professionals. For some, it is about continuing to strengthen internal capabilities, but for most of these organisations the issue is more about aligning their teams with technology playing a larger part.
| Australian asset owners in the Asset owner 100 (in US$ million) | |||
|---|---|---|---|
| Rank | Fund | Total assets | Primary category |
| 45 | Future Fund | $108,216 | Sovereign Wealth Fund |
| 53 | AustralianSuper | $103,810 | Pension Fund |
| 76 | Nulis Nominees (Australia) Limited (NAB/MLC) | $75,408 | OCIO & Master Trust |
| 86 | First State Super | $67,610 | Pension Fund |
| 87 | BT Funds Management Limited | $67,348 | OCIO & Master Trust |
| 92 | TCorp | $64,367 | Pension Fund |
| 96 | Colonial First State Investments Limited | $60,635 | OCIO & Master Trust |
| 97 | QSuper | $60,629 | Pension Fund |
| 100 | AMP Superannuation Limited | $58,078 | OCIO & Master Trust |
| Top 10 asset owners (in US$ million) | ||||
|---|---|---|---|---|
| Rank | Organisation | Country | Total assets | Primary category |
| 1 | Government Pension Investment | Japan | $1,443,554 | Pension Fund |
| 2 | Government Pension Investment | Norway | $1,063,456 | Pension Fund |
| 3 | China Investment Corporation | China | $900,000 | Sovereign Wealth Fund |
| 4 | Abu Dhabi Investment Authority | UAE | $828,000 | Sovereign Wealth Fund |
| 5 | National Pension | South Korea | $582,000 | Pension Fund |
| 6 | APG | Netherlands | $564,000 | Pension Fund |
| 7 | Federal Retirement Thrift | U.S. | $531,489 | Pension Fund |
| 8 | Kuwait Investment Authority | Kuwait | $524,000 | Sovereign Wealth Fund |
| 9 | SAMA Foreign Holdings | Saudi Arabia | $514,000 | Sovereign Wealth Fund |
| 10 | Hong Kong Monetary Authority Investment Portfolio | Hong Kong | $456,000 | Sovereign Wealth Fund |
