Allocators’ Biggest Worries? Finding the Best Data and Tools—and ESG

Macro concerns like wars also loom large for them, a Morningstar survey finds.

Reported by Larry Light

A lot of things trouble asset owners these days, from geopolitical tensions to regulatory demands. Atop all that, there’s insufficient good data and methods of managing it, according to the third annual Morningstar “Voice of the Asset Owner Survey.”

 The investment and research company conducted interviews with 13 allocators of varying types and sizes from North America, Europe and the Asia-Pacific region. Based on what it called “qualitative” insights from the interviews, Morningstar intends to field a wider, quantitative study later this year.

 In the study, macro concerns—interest rates, the Russia-Ukraine conflict, the Israeli-Hamas war and China’s rising influence in the world—were top of mind because the asset owners all have investments globally. The impact on their fortunes is not just theoretical. An official interviewed from a U.S. pension fund recounted that “when Russia invaded Ukraine, a lot of public funds like us had to write down our Russian assets.” 

On the operational level, the report found that the asset owners faced a large and growing array of duties to meet regulatory and transparency requirements. While the owners “have proven themselves to be practical and resourceful,” Morningstar acknowledged, they still fall short on resources they need to meet various government and other legal mandates. The allocators “believe the data and tools are improving but are not yet where they need to be,” the report concluded.

One U.S. public pension fund representative told Morningstar that he has scrambled to find the best processes to handle all the data, but it involves makeshift solutions patching together different procedures: “We will try our best to stick them together with tape and hope they hold.”

A European pension fund staff person said that “at times if you want something very specific and it’s not in the market, that can be a challenge.” So, allocators must be creative and often band together with peers to find solutions to problems, the European interviewee added.

The respondents showed widespread agreement that environmental, social and governance questions have become more important over the last five years, with the expectation that ESG would become even more “material” to investing decisions in the next five years. In Europe, that meant it would be an increasingly important factor in making investment decisions. In the U.S., however, the definition of “material” was more vague, as ESG concerns in financial matters are politically controversial.

U.S. allocators said they must be careful how they proceed with ESG. A person from a U.S. corporate retirement fund emphasized the caution that now is needed: “We’ve had to take slightly different steps in order to implement the ESG goals within the U.S. than we have in other markets.”

And at times, even considering ESG as a component of investing decision-making is unwise. As an individual from a U.S. public pension program assessed the situation, “Fiduciary responsibility is very narrowly defined in terms of financial risk and return only.”

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How Managers of Pension Funds, OCIOs Are Approaching Risk

 

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Asia-Pacific, Asset Owners, ESG, Europe, financial risk, Morningstar, North America, Russia Ukraine,