Evolution key to top funds’ growth

In the last decade, the world’s largest 300 pension funds have grown by more than 50 per cent and now total $15.7 trillion, representing over 43 per cent of global pension assets.

While this is solid aggregate growth, especially since it coincides with the recovery from the global financial crisis, it masks the challenges these systemically important funds will face in the next 10 years. How they organise themselves to search for attractively priced assets at acceptable risk will shape their fortunes and their ability to meet objectives.

During this decade, we have seen the investment community undertake a plethora of strategy innovations, as uncertain and often volatile outlooks in capital markets have played on asset owners’ minds. There is now a growing recognition among those at the forefront of industry thinking that an ability to adapt to a fast-changing landscape is critical, and that this is best achieved by sharing and implementing best practice. In brief, self-awareness is emerging as central to the evolutionary success experienced by the world’s leading asset owners.

Funds that are able to demonstrate more effective decisions through improved cognitive diversity and board-executive engagement, combined with better sustainability and risk management, are the ones emerging at the vanguard of the global asset owner industry.

This was highlighted in our recent research, sponsored by the Future Fund, titled Smart Leadership, Sound Followership. In it, we sought to benchmark and compare practices across 15 world-leading asset owners, chosen from the North American, Asia-Pacific, and Europe, Middle East and Africa regions, based on their global reputation, strong governance, significant size and thoughtful, outward-looking perspectives. Findings of the research include:

  • The importance of cognitive diversity: research is revealing that biases in investment decision-making settings are more numerous and deeply embedded than investors readily recognise. Using diversity effectively can help reduce the impact of biases.
  • Sustainability and long-horizon investing are too shallow: Sustainability is a critically important emergent subject, yet opportunities are being missed in the overlapping areas of sustainability, environmental, social and governance investing, stewardship and long-horizon investing.
  • Boards are having trouble being strategic: Boards seem strong in interpreting their funds’ mandates and ensuring executive accountability, but less so in their development of a strategic dialogue with their executive. This is a work in progress, revealing an opportunity for organisations to improve.
  • Risk management is key as the business landscape is changing: There is merit in using scenario analysis to manage risks. Studying the investment ecosystem, not just the markets, is critical for anticipating transformational changes ahead.
  • Funds are changing their mix of internal and external intellectual property: There can be a better grasp of how to optimise the value chain, including the nature of external strategic relationships. Technology and increased sophistication make network opportunities across funds potentially more valuable than ever.

The overriding lesson from this study is that self-awareness and cognisance of peer groups have played an intrinsic role in the evolution taking place across the world’s leading asset owners. We believe this will only become more important, particularly given the scarcity of investments that meet the current risk and return targets of many funds.

If asset owners are to repeat the growth attained in the last decade, it is imperative that they continue to expand their skills, particularly in a lower-return environment that looks set to remain a feature of the industry. Leading funds have set themselves apart through their ability to innovate, rather than rely on practices that may have worked in the past. This will be a particularly desirable characteristic for all asset owners in the decade to come.

Roger Urwin