McKinsey’s Guide to Building a Better Asset Owner

The consultant highlighted seven areas where the world’s largest pensions and sovereign wealth funds can improve.

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 collaboration.

“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 assets.

“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 poorly.

“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.”

Related: A Five-Year Plan for Asset Managers

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