The vast majority of executives at large pension and sovereign wealth funds plan to focus more on portfolio construction over the next five years rather than simply chasing alpha. The majority also plan to build direct investing capabilities in private equity, infrastructure and real estate, and also invest further resources to improve understanding their liabilities, a report from McKinsey & Co. said.
The management consulting firm surveyed 50 plan executives from a total of 27 global pension and sovereign wealth funds with collective assets of $7.4 trillion under management.
The biggest takeaway from the survey is a renewed focus on portfolio construction, said Sacha Ghai, senior partner and leader of the institutional investor practice at McKinsey.
“If you look at the evolution of this industry, it was very focused in the last 10 to 15 years on alpha and chasing alpha through active management, through direct investing, through building out your investment capabilities,” Mr. Ghai said.
The survey says executives are focusing back to the “basics of investing, which is building optimal portfolios and (strategic) asset allocations.”
Mr. Ghai also said this increased focus on strategic asset allocations will likely result in an increase in staff members focused on those areas, as well as more frequent asset allocation studies, and that the boards of trustees at pension and sovereign wealth funds will have to be more actively involved as well.
One particular focus is liabilities. The survey said plan executives are focused on trying to understand how to build their portfolio construction around their liabilities, with 92% saying they plan to invest in capabilities to improve their understanding of liability-aware and/or liability-driven investing.
Other responses include a greater focus on developing capabilities in direct investing. Seventy-seven percent of respondents said they are very likely or likely to build direct investing capabilities in private equity, and 74% each said they are very likely or likely to build those capabilities in infrastructure and real estate.
Fund executives also said what their priorities are for their institutions in 2020, with 85% of executives saying an important or top priority is “developing a high-performing culture” across their organizations, while the second-highest percentage, 69%, said an important or top priority is “evolving the risk management function.”
A copy of the report is available on McKinsey's website.