Asset owners are too important to fail in their mission of producing significant wealth and well-being outcomes for all of us who can afford to save. Their assets are worth around US$55 trillion, under a narrow definition, amounting to more than US$10,000 for every adult on the planet.
Yet the term asset owner, which first emerged a generation ago, is still misunderstood.
It applies to institutions which are both the economic owners of investment portfolios and have investment management responsibility for the portfolios. This contrasts with asset managers, who are agents, managing the mandates given to them by asset owners, and are not economic owners.
The most significant categories of asset owners – pension funds, sovereign wealth funds, endowments and foundations – manage assets to meet the needs of savers or investors. There is a fourth category: outsourced CIOs and master trusts which manage funds like asset owners, but are strictly speaking agents.
The distinctive feature of all these institutions is their discretion to put capital into any country and any asset class that suits them. Their decisions regarding asset allocation and stewardship shape capital markets and are a key element in the functioning of the global economy. Through their size and role they represent the most influential capital on the planet.
In a Thinking Ahead Institute study, Asset Owner 100 (AO100), we surveyed the 100 largest asset owners, responsible for US$19 trillion between them (at year end 2017). The largest of the AO100 asset owners is the Government Pension Investment Fund (GPIF) – the Japanese public sector pension fund responsible for managing US$1.5trillion. The AO100 is made up of 67 pension funds, 21 SWFs and 12 outsourced CIOs, with 44 located in North America, 30 in EMEA and 26 in APAC.
These are complex organisations that are having to adapt to tougher terrain. Many are building their internal teams while looking for deeper collaborations and strategic partnerships with peers and asset managers. This move to streamline intellectual capital is assisted by the increasing use of technology, an area in which asset owners have previously been out-spent by the asset managers. The AO100 group’s future success hinges on how well technology and data can be martialled and also how effectively their talent can be harnessed through creating the right cultures. Smart, motivated people allied to smart, integrated technology is becoming a mantra within their organisations, and also in their partner organisations.
The strength of AO100 leadership is increasing markedly as they leverage their scale. It will have to increase further amid greater need to function transparently, to better meet their members’ financial expectations, to become more sustainable and achieve a social licence to operate.
This social licence to operate is a new part of the asset owner proposition. It is a tacit social contract whereby asset owners gain legitimacy according to their actions and impacts. We, as individuals, may or may not have our money managed by them, but we certainly feel the effects of their investment footprint – for better or worse.
Asset owners cannot award themselves a social licence to operate, it requires external trust and legitimacy, and must have the implied consent of those affected. Investment has economic, environmental and social impacts, and stakeholders will grant legitimacy based on their view of these impacts. In other fields social licence has been lost, so the AO100 will have to be vigilant to avoid this fate.
The AO100 take their financial and social responsibilities seriously, but they will need an infusion of board talent to cope well with the complex agendas that confront them. And they will need to be more strategic, particularly on sustainability.
The institutions in the AO100 all own a large slice of the markets and the economies underlying them. The returns they need can only come from a financial system that works. They may need to help change the system in some areas, particularly where governance is weak and where portfolio assets may be impaired or stranded by fast-changing circumstances.
GPIF, for one, is leading the way. The Japanese fund sees its main vulnerability as systemic failure so it pursues a sustainability strategy based on managing ESG exposures and by being active stewards of long-term holdings. Like a number of the AO100, GPIF is a large, long-term and leadership-minded asset owner – a ‘Universal Owner’. Such funds are the most influential asset owners because of their systemic positioning.
The opportunities for the AO100 to step up to deliver better outcomes for more people are clear. Public policy should align these asset owners by influencing their governance and transparency where more needs to be done.
But this should not be to the detriment of innovation. The investment industry, suitably configured and aligned, is an immense force for promoting the well-being and fulfilment of the good society. And in the ranks of the AO100 there is the technical know-how to get big things done well.
All we need now is for strong leadership to have the courage of its convictions.
This post first appeared in Top1000 Funds