How Asset Owners Can Achieve Greatness

Sacha Ghai

Sacha Ghai

Global asset owners, such as the CPPIBs and ADIAs of the world, have increasingly built up their internal resources, while allocating more capital toward illiquid assets. Sovereign funds and other massive pensions often use their balance sheet as tools to generate outsized returns by harvesting the illiquidity premium. However, questions loom: How can asset owners be prepared from a period of post-global financial crisis to the next economic period? To answer that question McKinsey released a report titled, “From big to great: The world’s leading institutional investors forge ahead,” which details trends, opportunities and suggestions on how asset owners can becoming high-performing organizations.

Portfolio Construction

McKinsey surveyed 27 large, geographically diverse pensions and sovereign wealth funds at the executive level, which in total amounted to US$ 7.4 trillion in assets. McKinsey’s survey and interviews came to the conclusion that more public institutional investors will take on a different approach to asset allocation. The old model of solely relying on backward-looking data is no longer cutting it. As Sacha Ghai, a Senior Partner at McKinsey puts it, “portfolio construction is the priority,” when it comes to returns. Ghai leads the consulting firm’s global institutional investor practice.

Ghai also talked about how asset owners are starting to place more emphasis on asset allocation by building up their internal resources. From a portfolio construction point of view, for example in infrastructure, Ghai noted that asset owners, “are looking at trends in regulations, while factoring in economic growth and exogenous factors that can shock the system.” Thus, more large pensions are developing their own house views on where markets are heading versus purely relying on advisor or consultant forecasts.

Alpha is much harder to find for wealth funds and pensions, and the collapse of the risk premia has forced asset owners to take on incremental risk. More owners are allocating toward illiquid strategies, and according to McKinsey’s survey, 75% of the respondents are likely and very likely to go into investment areas that are currently not in their portfolio or strategy, such as direct lending and reinsurance, in the next five years.

How Can Mid-Tier Asset Owners Generate Big Returns?

77% of the investors surveyed either likely or very likely plan to build direct or lead investing capabilities in the next five years. Often, the smaller wealth funds and pensions, averaging US$ 50 billion in assets, are in constant competition with larger asset owners for access to talent, top-tier funds, co-investments and direct investments. Ghai believes that mid-sized pensions and wealth funds can have teams as great as the larger asset owners. Ghai stated, “There is no reason a US$ 200 billion fund should be able to attract better talent than a US$ 75 billion fund. It comes down to ambition.”

Ghai says that asset owners who want greater access to deals, to be viewed as reliable partners and generate more opportunities must build internal talent and create a high-performance culture similar to what leading firms in other sectors do, for example Apple in high-tech and GE in industrials. Asset owners could enhance reputation by opening foreign offices, showing capital commitments to markets, building networks by attending conferences and partnering with local players. Wealth funds and pensions that recruit excellent people have the ability to tap into a massive deal network, which makes a significant difference. The McKinsey survey reinforces what the SWFI has been reporting for the past few quarters: More wealth funds and pensions will follow the direct investing trend, rethink asset allocation to make it more forward-looking, while needing to adjust internal resources for it.

Here is a link to the McKinsey report.


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