It’s an understatement to say that the economic landscape is growing more complex for institutional investors. With inflation increasing, European war intensifying global uncertainty, businesses still emerging from a historic pandemic, and a host of other factors, many asset owners are facing challenges they’ve never confronted before during their careers.
Fortunately, certain other circumstances – including a strong community bond and burgeoning technology – are giving asset owners greater power to unite, collaborate, and amplify their voice in institutional investing to generate the positive incomes they need and want.
“Asset owners are aware that they are facing increasing complexities, but they are also aware that, more than any other time in history, they are able to effect change,” says Melanie Pickett, Head of Asset Owners, Americas, for Northern Trust. “They have gone from being price takers to price makers, and they are doing that by working together, by embracing new technologies, and by leading the way on ESG.”
In the next decade, asset owners will look to consolidate and build new alliances, increasingly leveraging technology to generate insights and create standardization to solidify their place at the vanguard of environmental and social change – while continually building stronger, more transparent, and better governed models.
Ahead, we’ll take a deeper look at key factors driving these trends.
It’s a mission-driven community
“The community across our asset owners is very strong,” says Pickett. “They don’t compete with one another, so the idea of banding together has existed for a long time in the asset owner space.”
Endowments offer an example, she notes. Earlier in her career, she worked with a group of chief operating officers across endowments and foundations that collaborated on issues important to them. “That ranged from how we evaluated service providers to how we tackled regulatory issues, lobbying for certain regulatory changes, or even just dealing with specific industry changes or market changes that were happening,” Pickett says.
Today, a number of similar peer groups exist among differing segments of Northern Trust’s client base, Pickett says, including pension and sovereign wealth funds. While working together to wield greater influence to benefit their portfolios, they’re also placing a priority on creating positive change in the industries and geographic regions their investments touch.
“All of our clients in the asset owner space are mission-driven to some extent, and they’re trying to deliver the best risk-adjusted returns for their institution’s mission,” says Pickett. “The more that we can help them make more efficient investment decisions, the greater good they’re able to do in their own communities and in the world.”
Advanced tech is opening new possibilities
Cutting-edge technology is one of the most powerful factors in amplifying the voices of asset owners, Pickett notes. Professionals mired in data silos and spreadsheets just a decade ago can now tap modern data-science tools to efficiently manage their information – gaining both the critical insights they need to apply leverage and the liberated time to properly exert it.
“Technology is changing the landscape,” says Pickett. “Data science is really helping asset owners understand the skill and the persistence of returns of their asset managers.” With advancing machine learning able to harness unstructured data, and increasingly powerful integrated platforms offering a comprehensive view across all investments, asset owners can continually make more useful analyses of their portfolio’s myriad risks, exposures, and performance drivers.
One market-leading tool: Front Office Solutions
Northern Trust’s Front Office Solutions is a leading technology platform offering asset owners these vital capabilities. A holistic digital and service solution for institutional portfolios, Front Office Solutions enables institutional investors to reach new levels in data integration, team collaboration and portfolio analysis. “For me, part of the passion in creating Front Office Solutions was giving sophisticated asset owners the capability to scale their work, so that they could apply more time to value-added investment activities with respect to manager selection and their overall investment process,” says Pickett. “This helps free up the time they need to manage their portfolios more efficiently and effectively, and also helps them increase their influence in the industry.”
A key differentiator for Front Office Solutions is the team behind it, she notes. “It’s paired with a very high-touch service model. We’ve built a team of people who came from being either asset owners themselves, or working for general partners, or have other types of expertise in private assets, as well as in performance and analytics,” says Pickett. “This means we are really acting as an extension of our client’s office with respect to helping them manage all of their data – and providing high quality information they can leverage to help make their decisions.”
More consolidations and consortiums
As mentioned previously, asset owners have a strong sense of community that fosters cohesion. But they’re increasingly formalizing their united fronts with consolidations and consortiums to command more power and influence.
“Complex portfolios equal complex data which results in a complex operating environment for asset owners, as the pressures increase on investment teams and institutions. Consolidation makes more and more sense in respect to getting scale,” says Pickett. “Getting access to the right managers is also a factor. Consolidation leads to new investment opportunities. The big players in the private investment space, for example, can command entire funds or entire deals.”
Pickett notes that she’s seeing the current wave of unifying chiefly focus on two spaces. The first is the consolidation of asset pools to create more scale and gain access to new investment opportunities (the recent Pension Consolidation Act 2022 in Illinois, consolidating the police and fire pension plans, is an example). The second space is, unsurprisingly, ESG.
Seeking greater control in ESG
“Given asset owners are mission-driven, values-driven organizations, ESG certainly aligns with their values – but they also need to be in alignment with the expectations of their shareholders while ensuring they maximize their returns,” says Pickett. “With the complicated variations in criteria, definitions and standards in ESG, many asset owners don’t feel comfortable allowing their managers or other outside parties to control access to the data needed to thoroughly scrutinize investments from an ESG standpoint. And, frankly, many can’t afford to simply hope that their managers or those outside parties hold themselves accountable to similar ESG standards as the asset owner.”
Asset owners are taking advantage of both the consolidation trend and advances in data-science technology to address these problems.
“We’re seeing a number of clients working together to gain access to the ESG data they need,” says Pickett. “When asset owners cooperate to promote a specific set of standards or data points that they’re looking for, they’re able to get more efficient, effective data from their investment managers. And with access to the right data, asset owners can influence their managers by formalizing those data requirements together.”
As far as encouraging investment managers to improve their own ESG standards, one specific consortium formed for this purpose is the Institutional Allocators for Diversity, Equity and Inclusion (IADEI). “It’s a group containing many of our clients, primarily endowments and foundations, that are focused on finding more diverse investment managers, and creating more access to capital for investment managers who come from diverse backgrounds,” says Pickett.
Many asset owners use Northern Trust’s Front Office Solutions capability to track diversity or other ESG factors among their investment managers and portfolio companies. “That’s one of the capabilities we have within Front Office Solutions, and we know through working with our clients that they’re tracking diversity very specifically and in great detail in some cases,” says Pickett. “Just as we can track information within Front Office Solutions and other technologies at Northern Trust, we’re then able to give asset owners an easy way to analyze the efficacy of many ESG decisions to analyze their risk-adjusted performance.”
Thriving in a complex world
All asset owners of every size – including endowments, foundations, pensions, sovereign wealth funds, and others – can enjoy unprecedented advantages in fulfilling their missions and investing objectives by leaning into the trends examined above. By harnessing data more effectively, gaining better oversight of their complex investments, and forming ready alliances to wield greater collective power and leverage, asset owners can continue to amplify their voice in the institutional investing community.
“Northern Trust has had an unwavering and longstanding commitment to the asset owner space for many decades. Innovating for our clients in a way that mirrors their missions and their values is something that our employees are inspired by and passionate about,” says Pickett. “Our stated goal within the asset owner segment at Northern Trust is to empower the missions of our clients – which means helping them maximize their investment returns so that they may then serve their constituents, their communities and the world we live in.”
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