ANALYSIS

Top funds’ strengths, challenges

A study of the organisational behaviour of large asset owners by the Future Fund and Willis Towers Watson gives unique insight into how leading asset owners have tackled the challenges of organisational growth, staff retention, remuneration, and effective decision-making in the context of long-horizon investing.

The study, which compared practices across 15 leading funds globally, helps validate the high standards these funds target and also highlights some opportunities for sharing ideas. The funds, with a combined $4 trillion in assets, were chosen for their strong governance, significant size and thoughtful international perspectives.

The study produced a number of ideas to follow in support of international best practice. These included: improved cognitive diversity, better sustainability, improved board-executive engagement, strengthened risk management through better understanding of the ecosystem, and better balance in the mix of internal and external intellectual property.

“We think [these funds] are creating followership opportunities in which other funds can develop sound practices consistent with these leadership exemplars,” the report states.

The study revealed the challenges and opportunities of the funds, including their investment and organisational challenges.

The funds are struggling with tensions created from staying in a flat and integrated structure, the natural shift to multiple specialist teams, and pressures to keep to one integrated strategy at the total fund level (one-portfolio thinking). Also, discussion of strategy at many of the funds still begins with asset classes, even though more of the thinking is now about allocations to risk factors and return drivers.

Some study participants have developed more engaged partnerships with outside firms and have seen clear benefits of this collaboration; the study identified the benefits to come from such collaborations in the future as well. This analysis extended to the question of how to optimise the value chain of outside providers and internal professionals and the sharing of intellectual property across internal and external asset management, along with extending strategic relationships beyond asset-management firms.

The study also looked at the importance of diversity.

“Research is uncovering biases that are present in investment decision-making settings. These are more numerous and deeply embedded than investors readily recognise,” the study states. “There are opportunities in using diversity effectively to reduce the impact of biases.”

Despite these funds having self-awareness around diversity, however, only 20 per cent had a female chief executive, and none of them had a female chief investment officer.

In the areas of sustainability and long-horizon investing, the study found that funds were too shallow and opportunities were being missed.

The study also found that boards are “having trouble being strategic”, and it highlighted the importance of risk management, particularly scenario analysis.

In culture and people management, the study examined compensation schemes and how to deal with organisational growth, making a case for considering “soft costs”.

“At the scale of most of the participant funds, the marginal hard cost of adding an additional staff member is close to zero,” the authors wrote. “The soft cost – in terms of impact on factors such as culture, clarity of decision rights and organisational momentum – might be considerably greater. Considerable care should be applied to weigh the benefits of additional staff relative to the hard and soft costs involved.”

 

Snapshot – Of the 15 funds in the survey:

9 have a chief investment risk officer/chief risk officer

11 have a chief compliance officer/general counsel

6 have a chief technology officer

13 have dedicated staff for environmental, social, governance investing/sustainability

10 have specific sustainability investment beliefs

3 have increased their allocation to sustainable investment over the last year

5 plan to increase their allocation to sustainable investment over the next 5 years.

 

 

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