The world’s most influential capital

Asset owners are too important to fail in their mission – producing wealth and wellbeing for all of us who can afford to save. Their collective assets are worth about $55 trillion, under a narrow definition, amounting to more than $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 that are the economic owners of investment portfolios and also have investment management responsibility for those portfolios. This contrasts with asset managers, who are agents executing 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 another category: outsourced CIOs and master trusts that manage funds like asset owners but are, strictly speaking, agents.

The distinctive feature of all these entities 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.

Survey of the biggest

In a Thinking Ahead Institute study, Asset Owner 100 (AO100), we surveyed the 100 largest asset owners, responsible for $19 trillion between them (at year end 2017). The largest of the AO100 is the Government Pension Investment Fund (GPIF) – the Japanese public-sector pension fund responsible for managing $1.5 trillion. The AO100 is made up of 67 pension funds, 21 SWFs and 12 outsourced CIOs; 44 are located in North America, 30 are in Europe, the Middle East and Africa, and 26 are in the Asia-Pacific region.

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 asset managers. The AO100 group’s future success hinges on how well they can marshal technology and data, and also how effectively they can harness their talent by creating the right cultures. ‘Smart, motivated people allied with smart, integrated technology’ is becoming a mantra within these 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, better meet their members’ financial expectations, 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, along with 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; the AO100 will have to be vigilant to avoid this fate.

A complex agenda

The AO100 asset owners 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 come only 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 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 and 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.

This should not be to the detriment of innovation. The investment industry, suitably configured and aligned, is an immense force for promoting the wellbeing 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.

Roger Urwin is global head of investment content at Willis Towers Watson.