Large asset owners will need to develop a new risk management approach amid increasingly fraught political and investment conditions, according to a new Thinking Ahead Institute (TAI) study.
The TAI ‘Asset Owner 100’ report says “today’s complex, interconnected risks” such as geopolitical tensions, climate change, inequality and other systemic problems require a more holistic asset management style that chimes with the ‘total portfolio approach’ pioneered by the NZ Superannuation Fund (NZS).
“Risk 2.0, therefore, goes beyond conventional measures like volatility alone but also considers interconnected nature of risks and aims to provide safeguard long-term mission integrity,” the TAI study says. “This forward-thinking approach aligns well with Total Portfolio Approach (TPA) principles, focusing on meeting investment goals in sustainable ways.”
TAI namechecks NZS, the Australian Future Fund and the Canada Pension Plan as early-adopters of TPA that has delivered “1.7% higher alpha” compared to strategic asset allocation models over the last 10 years.
Asset owners must also deal with the ongoing encroachment of politics into their patch, the report says, citing the recent UK ‘Mansion House’ reforms aimed at encouraging domestic investment.
But the trend is looming large in this hemisphere, too, including the move in November by the Australian government to ‘tweak’ Future Fund settings and NZ politicians making noises about KiwiSaver and NZS asset allocation priorities.
“The investment industry is increasingly subject to political influence as governments leverage policy and regulation to shape financial strategies that align with national priorities,” the TAI study says.
“Political agendas are now more intertwined with asset allocation decisions, particularly in sectors like infrastructure…
“As a result, the investment landscape is evolving into a domain where asset owners are not only influenced by market dynamics but also by policy and political shifts, requiring a sophisticated approach to manage the intersections of financial return and regulatory compliance and stakeholder influences.”
Despite the challenges the 100 largest asset owners – a list topped by the almost US$1.6 trillion Government Pension Fund of Japan – clocked up bumper total returns of 12.3 per cent last year to end 2023 on a record US$26.3 trillion.
The result followed a collective loss of 8.7 per cent for the big asset owners.
However, Jessica Gao, TAI director, said in a release that sustained high market volatility combined with other macro-level trends such as geopolitical uncertainty, technology advances and climate change pose new threats for asset-allocators.
“Traditional risk management relying heavily on historical data and linear models struggles to keep up with today’s complex, interconnected risks,” Gao said. “A new approach will be required to understand and manage risks that arise from complex, systemic sources with limited historical precedent.”
Among other sector breakdowns, the TAI study shows the global market share of outsourced chief investment officer (OCIO) providers – also known as implemented consulting – in a chart headed by Mercer that counts almost US$470 billion under management: Goldman Sachs, BlackRock and Aon round out the top four with respective fifth- and sixth-placed WTW (TAI founder) and Russell Investments almost equal on US$163 billion and US$162 billion.