(January 24, 2013) — A growing community of long time-horizon institutional investors known as ‘frontier investors’ that includes sovereign funds, public pension funds, and endowments, located in cities outside of the major international financial centers (IFCs) are rethinking how they allocate capital, according to a research paper.
Their goal: to ‘insource’ asset management, according to Adam Dixon of the University of Bristol and Ashby Monk from Stanford University.
The authors assert that these large beneficiary institutions located outside IFCs represent a window of opportunity to remake the map of the investment management industry. However, “replicating the external market for financial services within the community of frontier investors brings up significant issues related to scale and expertise,” the authors warned.
“The global financial services industry has been subject to ongoing criticism in the wake of the 2008-09 financial crisis,” the paper asserts. “From social movements like Occupy Wall Street to the economic elites at the World Economic Forum, there is widespread concern that the leading edge of the financial services industry has lost sight of its overarching objective function: To facilitate the efficient allocation of economic resources over space and time under conditions of risk and uncertainty.”
According to the paper–titled “Frontier Finance”–this growing community of long time-horizon institutional investors is pushing back against the misaligned incentives, high fees, poor returns, and short-termism embedded in most third-party asset management agreements– all of which the financial crisis fueled.
The objective of frontier investors aiming to insource asset management is to maximize the welfare of beneficiaries, the authors claim.
Click here to read the full paper.
Related article:The Intricate Economics of (Outsourced) Investment Labor