The world’s leading asset
owners have already built large organizations and amassed trillions of dollars.
But to become “truly great,” these institutions will need to develop new and
better capabilities, according to McKinsey & Company.
In a survey of some of the
world’s largest pensions and sovereign wealth funds, the consultant identified
seven areas in need of improvement: culture, risk management, talent
development, reputation, research, investment decision-making, and advocacy.
The top priority, cited by 89%
of institutions, was to develop a high-performing culture that encourages
“Organizations have grown up in
silos around their asset classes—each with its own portfolio, investment
policy, operating processes, and so on,” the report stated. “To successfully
capture the next wave of investment opportunities that fall between asset
classes, investors will have to build some bridges.”
McKinsey’s advice? Identify
both the current culture and the target culture, and from there determine the
best path to get from one to the other. More specifically, the consultant added
that funds can incentivize change through compensation and adapt tactical
approaches to enable desired behaviors, such as a creating a pool of capital
that requires cross-asset class collaboration.
Another high priority, listed
by 69% of respondents, is “fixing” risk management to assess and manage risks
that are evolving, especially as institutions grow their exposure to illiquid
“Some institutions might use an
absolute-risk perspective (complemented with some limited relative-risk
measures),” the consultant suggested. “Some may consider looking to credit-risk
assessments such as those used by banks to assess to the probability of capital
loss for key investments.”
Almost equally important to
surveyed asset owners was attracting and retaining investing talent. Here,
McKinsey said institutions should leverage their unique value proposition: A chance to participate in some of the biggest deals in the world, freedom from
the burden of raising capital, and the potential for young talent to take on
more responsibility earlier in a career.
Good branding will also help
funds stay competitive, both in talent and investments, the consultant added. Investment
practices can be further bolstered by stronger internal research—on both
portfolio construction and more thematic topics.
To “de-bias” the investment
decision-making process—a priority for 59% of institutions—McKinsey said
institutions should actively work to remove bias by strengthening and
formalizing due diligence processes at every stage of an investment, including
a post-mortem review of how decisions were managed when investments turn out
“Good (and bad) investment
outcomes are mostly attributable not to the analysis that precedes an
investment, but to the quality of the process and its adherence to standards of
sound and objective decision-making,” the report stated.
Finally, McKinsey highlighted
the need for advocacy—using asset size as influence to drive alignment of
interests with other stakeholders such as the government.
“Building these capabilities
will incur costs, of course,” the report concluded. “We strongly believe that
the investments now required to reach greatness will pay for themselves.”
Five-Year Plan for Asset Managers