The Most Influential Allocators?

Benefits Canada reports, Pension funds comprise more than half of world’s largest asset holders:
The Canada Pension Plan Investment Board is one of the top 20 asset owners in the world, at US$283.45 billion, making it one of the most influential capital allocators in existence, according to a new report by Willis Towers Watson’s Thinking Ahead Institute.

Looking at the world’s 100 largest capital management organizations, which are collectively responsible for US$55 trillion, the report notes these investors have the power to determine the current and future shape of capital markets.

Pensions play a massive role in this arena, since 61 per cent of the capital managed by these top 100 players is controlled by pension funds. Japan’s government pension investment fund controls the most money of any of organization, with more than US$1.4 trillion, followed by Norway’s government pension fund with more than US$1 trillion. Indeed, 10 of the top 20 are pension funds, with the CPPIB sitting at No. 16. Sovereign wealth funds also play a major role, controlling 32 per cent of the capital in the top 100, with outsourced chief investment officers and master trusts making up the remaining seven per cent.

“There is […] a more overarching need for these large asset owners to understand the world in which they operate and over which they potentially hold such influence,” said Roger Urwin, global head of investment content at the Thinking Ahead Institute, in a press release. “Over the next decade, this means doing more to institutionalize professionalism, streamline operating models, leverage culture and diversity more effectively and evolve the investment model into increasingly smart and sustainable arrangements.”
The Thinking Ahead Institute put out a press release revealing the “most influential capital on the planet”:
The Asset Owner 100 – the world’s 100 biggest asset owners – account for around US$19 trillion, or nearly 35% of capital held by all asset owners globally, according to a new report from Willis Towers Watson’s Thinking Ahead Institute.

In its first study of the Asset Owner 100 (AO100), the Thinking Ahead Institute describes this unique group as being responsible for investing the “most influential capital on the planet”, with the discretion to place their capital into any country and into any asset class. As such, the report argues, they have the ability to shape capital markets and to play a key role in the smooth running of the global economy.

Roger Urwin, Global Head of Investment Content at the Thinking Ahead Institute, said:

“With around US$55 trillion in assets - a sum that is more than $10,000 for every adult on the planet - asset owners globally are too important to fail in their mission. They have little choice but to take their financial and social responsibilities seriously, and not to shirk the big issues. These include the need to develop stronger leadership, respond effectively to regulation, manage agency issues and improve control over outcomes.

“There is also a more over-arching need for these large asset owners to understand the world in which they operate, and over which they potentially hold such influence. Over the next decade, this means doing more to institutionalise professionalism, streamline operating models, leverage culture and diversity more effectively and evolve the investment model into increasingly smart and sustainable arrangements.”

The Thinking Ahead Institute’s analysis found that 61% of the assets of the AO100 are held by pension funds, with 32% held by sovereign wealth funds and 7% by outsourced CIOs and Master Trusts. The largest region in terms of assets under management was Asia/Pacific (36%), with 34% in Europe, the Middle East and Africa, and 30% in North America.

The top 20 funds total nearly US$11trillion in assets, accounting for 56% of the total assets of the AO100 (see below).

The full report is availabe here and I encourage you to read it carefully. Below, I provide the highlights:
  • Discretionary assets under management of the world’s 100 largest asset owners totalled US$18.69trillion
  • The top 20 funds total US$10.5 trillion and represent 56% of the assets in the ranking
  • APAC is the largest region in terms of AUM, accounting for 36% of all assets in the ranking
  • EMEA and North America’s assets represented 34% and 30% respectively
The most influential capital on the planet
  • The Asset Owner 100 – the largest 100 asset owners in the world – represent approximately US$19 trillion out of an estimated US$55 trillion in total.
  • These institutional investors warrant particular attention because they have the discretion to place their capital into any country and any asset class that suits them. It follows that their policies and their decisions regarding asset allocation and stewardship shape capital markets and are a key element in the smooth functioning of the global economy.
  • These asset pools are the most influential capital on the planet.
  • These asset owners are spread around the world, and represent a range of types of organisation:
  • The emergence of OCIOs and master trusts as a new category of asset owner reflects the significant increase in the delegation by asset owners of key decisions to external organisations – it is the extent of discretion that is delegated that differentiates these platforms from traditional asset management.
  • The most influential members of this group of 100 asset owners are those who qualify as universal owners. These are organisations that are very large and long-term in horizon that also have a leadership mind-set. Universal ownership acknowledges the influence that investment decisions have beyond the portfolio itself onto wider stakeholders and systemic considerations, and the responsibility and opportunity that comes with that.

Source: Thinking Ahead Institute

What is an asset owner?

In our view, an asset owner has five qualifying characteristics:
  1. Works directly for a defined group of beneficiaries/savers/investors as the manager of their assets in a fiduciary capacity (upholding loyalty and prudence) under delegated responsibility
  2. Works with a sponsoring entity, usually a government, part of government, a company or a not-for-profit
  3. Works within explicit law and possesses an implicit societal license to operate because of its societal trust and legitimacy
  4. Delivers mission-specific outcomes to beneficiaries and stakeholders in the form of various payments or benefits into the future
  5. Employs a business model that combines a governance budget (essentially resources and processes) and a risk budget (reflecting the mix of financial assets that delivers on the mission).
Pension funds are the single biggest group of asset owners meeting all the qualifying criteria above. Sovereign funds, OCIOs, endowments and foundations also fully qualify. Other institutions, such as insurance companies and mutual funds only partly qualify and so have been excluded from this study.
Again, take the time to read the full report which is available here.

There's no question the top 20 global pensions and sovereign wealth funds are part of the most influential allocators on the planet as they account for $11 trillion of the $55 trillion in global assets.

Japan and Norway's pensions are the pension behemoths and China Investment Corporation and Abu Dhabi Investment Authority are the two largest sovereign wealth funds.

It's important to note, however, that influence doesn't just come in the form of capital. Togther, Canada's top ten defined-benefit pensions make up roughly $1.2 trillion in assets but their success has garnered the attention of the world.

When it comes to DB pensions, the Dutch, the Danes and Canadians have found success in their model based on governance, transparency, and attracting talent to manage as many assets as possible internally.

Norway's pension also has great governance and first-rate transparency. I did a report for the Canadian federal government years ago looking at the elements of great governance and found that Norway had a lot of great checks and balances and was extremely transparent but the Fund was slow to invest in private markets which it's only now starting to do.

Anyway, what is interesting is even though the top 20 funds yield enormous power, they all invest in the same large private equity and hedge funds and have made the Dalios and Shwarzmans of this world spectacularly wealthy (sure, they earned it but it helps when the same pools of capital invest in the same funds).

From that vantage point, you wonder who really has the power.

But there's no doubt the top 20 funds have enormous clout and are starting to lend their voices to important causes, like fighting climate change and forcing companies to promote diversity.

In fact, I've had rigorous intellectual discussions with Jonathan Nitzan, professor of political economy at York University, on the role of pensions in capitalism and whether they mitigate or promote inequality and are part of the problem or solution to global warming.

In my opinion, global pensions, sovereign wealth funds and large asset managers like BlackRock, have a very, very important role in determining the future of capitalism and improving our societies.

Jonathan thinks so too but he told me is the problem is pensions act a lot like capitalists focusing on returns, so it's not self-evident they promote social welfare by tackling inequality (I think they help).

Anyway, that's another discussion for another time but I do believe the most influential allocators on the planet must step up to the plate and improve the world we live in.

Below, the story of CPPIB and how it's investing today for your tomorrow. I've said it plenty of times, Canadians have no idea how lucky they are to have CPPIB managing the assets of the Canada Pension Plan. The same goes for Canadians who have access to other large, well-governed defined-benefit pensions. We should never underestimate the value of a good pension.