In the grand theatre of global finance, there exists a crucial but often overlooked ensemble cast: the asset owners.
These institutions, charged with stewarding vast sums of capital on behalf of beneficiaries, play a pivotal role in shaping our economic landscape. Yet, in the UK, their numbers are dwindling and their influence is on the wane – an unsettling trend that demands our attention.
What exactly is an asset owner? Think of them as guardians of collective wealth, operating as a principal player in a fiduciary capacity to deliver value to their beneficiaries. They possess a societal licence to operate, an independence and wield influence over the allocation of capital on a global scale.
Consider this: the top 100 asset owners worldwide, a group that could fit into a large conference room, control a staggering $23.4trn (£18.7trn) in assets. Yet, the UK lags behind, with only a single asset owner making that list.
Why does this matter? Because asset owners, such as pension schemes, have influence, they serve as a bulwark against the tide of financial complexity and opacity.
Our fragmented system, characterised by a proliferation of intermediaries and a dearth of true principals, stifles the growth of asset owners and undermines their effectiveness here.
Two specific themes that I have seen play out over the first two decades of my career have profoundly shaped global markets and have also increased the importance of strong asset owners. Firstly, the move from active to passive, and secondly the move from holding portfolios of stocks to portfolios of funds.
Traditionally, investors directly owned stocks in companies, enabling them to exert direct influence over capital allocation decisions. However, the modern investment landscape is characterised by a labyrinthine chain of intermediaries that often obscures investor preferences and introduces agency issues.
In this world, capital allocation decisions are often separated from other investing decisions, with stock-level capital allocation increasingly being led by index providers and asset class-level allocation happening elsewhere in the chain.
This system has a lot going for it: it’s got more people participating in the benefits of investment returns, but it does have some under-appreciated bad consequences.
The first negative consequence is that an investor’s preferences get lost in that long chain, especially once they are commingled up with other investors into a pooled fund.
Another big problem is agency issues that develop all the way up and down this chain: the folks working on behalf of the end investor, such as pension scheme members, at these different stages do not have the best interests of these savers at all times. While this isn’t unique to investing, such an elongated chain exacerbates it.
Finally, another problem is that stasis can easily get embedded in such a long chain, things don’t easily change, thinking becomes entrenched and moves into received wisdom.
Our lives in their portfolios: Why asset managers own the world is an excellent book by Brett Christophers which I recommend, and its premise is important.
Consider that 66% of corporate C02 emissions are estimated to come from about 100 companies. And that sort of skew is repeated again and again. A hundred companies with the greatest impact on our natural habitat, on human health, on the built environment around us and even the water we drink.
Shouldn’t we care more than we do about who owns these companies and to whom they are accountable?
Boards are accountable to shareholders and have wide discretion when it comes to pursuing their goal of creating shareholder value. They can choose to do so in ways that do or don’t create pollutions, harms or exploitation.
But who in that investment chain is even asking the question? Too often these companies are reduced to numbers within an index, which is one of many in a spreadsheet of a fund manager, and many in the model portfolio of a platform or consultant. Things get lost. Asset owners can restore that balance.
What we need in the UK are more asset owners to ask tough questions, because, due to a fragmented system, there simply aren’t enough of them, and we must not lose sight of how important asset owners have become.
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