RETHINKING
ASSET OWNER MODELS

Keys to Achieving Operational Investment Excellence

BNY Mellon || Stanford Long-Term Investing

RETHINKING
ASSET OWNER MODELS

Keys to Achieving Operational Investment Excellence

November 2023

 

Global asset owners are proactively addressing a myriad of challenges as they strive to enhance operational efficiencies, create relevant investment strategies, implement effective risk management techniques and nurture talent. Notably, the role of data and technology is paramount amid an ever-sharper focus on operational investment excellence.

 

To explore new ways of thinking to achieve these goals, BNY Mellon collaborated with Dr. Ashby Monk of Stanford Research Initiative on Long-Term Investing to bring together industry leaders at the inaugural Asset Owner Leadership Summit in London (the Summit). The objectives of the Summit included sparking debate, sharing experiences and fostering new insights while helping asset owners shape a new path forward to thrive in today’s evolving investment landscape. Key insights from the Summit are discussed below. 

 

Five Key Themes from the Asset Owner Leadership Summit

1. Capitalize on Conditions for Pursuing Innovation

 

According to Dr. Monk, asset owners should not overlook the fact that 100% of investment performance is a function of the organizational capabilities supporting asset allocation decision making. This not only shapes the foundation of an investor’s identity, but also serves as the compass that guides their investment decisions and influences portfolio returns.

 

To achieve consistency in performance, innovation is crucial and demands a deliberate organizational process of discovery and collaboration both internally and with peers. This is why innovation is a challenge for asset owners, since it is not predictable, cheap nor fast. Plus, radical innovation without process behind its implementation poses a certain level of risk.

 

It is clear asset owners want to seize untapped innovation potential and are seeking new “Communities of Learning” to pool knowledge and share experiences. Yet cross-border sharing of best practices is in its infancy.

 

Today’s market and economic environment could provide a turning point where the challenges at hand could spur the kind of innovation that revolutionizes and propels businesses and industries forward, similar to how past crises helped unlock organizational inertia and accelerate innovation. 

2. Establish a Cost-effective and Scalable Operating Model

 

All asset owners want to build a scalable operating model at a sustainable cost. According to a survey conducted at the Summit, balancing cost pressures and managing the resulting execution priorities such as outsourcing and tech investments is the most significant challenge asset owners currently face.

 

The key considerations to achieve this, however, include how to balance internal versus outsourced capabilities, which external partners to select and the extent of the impact of outsourcing on the firm’s long-term ability to innovate.

 

An ongoing challenge stems from public and private markets still operating on separate stacks – in terms of data, systems, people and third-party providers. As a result, bridging this gap represents a significant opportunity to boost operational efficiency and investment performance in line with the continued growth in private market allocations.

 

Another issue for asset owners is the cost of data and its supporting operating environment. This has an outsized weighting on asset owners’ overall cost base, so solutions to collectively ingest public and private market data, overlaid with proprietary data and processing it at scale, would create significant opportunities going forward.

 

At the same time, asset owners continue to grapple with the absence of a centralized operational view across all elements of their investment and asset books of record. Therefore, savings from avoiding consequential failed trades, tax errors or redundant data scrubbing are potentially enormous.

 

To spearhead a successful operational transformation and achieve a scalable model at a reasonable cost starts with agreement on a set of practical design principles. This includes, for example, setting a maximum number of external providers and agreeing that all insourced systems must serve at least two different purposes.

Attendee Insights

3. Pursue Data as a Service

 

Almost 60% of asset owners surveyed at the Summit emphasized that establishing a data management and governance model to foster growth and generate alpha is their foremost strategic imperative. Where many say they fall short in this endeavor is achieving a well-articulated vision and blueprint for implementation.

 

Investors tend to agree that the most effective data solutions are likely to come from industry collaboration and outsourcing due to the required scale of investment needed to achieve them. The drawback is that those available in the market today are still in early stages of development and are not yet as industrialized nor as repeatable as other processes within the securities services industry, despite a relentless pace of innovation.

 

A significant concern arising from the rapid advancement of data solutions is the potential oversight of underlying model assumptions and the perpetuation of biases which might even be amplified in new data-driven systems. This lack of scrutiny can lead to inaccurate prediction, reinforce pre-existing biases and ultimately hinder the effective use of advanced data solutions. 

 

Attendee Insights

4. Optimize Tech Discovery and Pay-offs

 

When it comes to trying to align investment strategy with their operating model, 67% of asset owners surveyed at the Summit cite integrating new technologies as a key challenge. According to Monk, this is because the process that most asset owners apply to tech discovery is inefficient. For example, they do not systematically document the key problem statements nor route them to entrepreneurs and innovators to solve.

 

Asset owners, being “dual objective” organizations that combine financial objectives with a social mission, can be particularly effective at driving innovation because their focus is beyond just achieving profitability. Tech disruptors need to take greater notice of asset owners’ influence and financial resources to pursue more pertinent use cases.

 

At the same time, emerging technologies like artificial intelligence (AI) offer significant hope and ambition to help boost investment performance and simplify operational processes. While machine learning (ML) has already been successfully deployed in areas such as predictive analytics for failed trades, among others, interpretative AI that aids chief investment and chief risk officers is still in an early phase.

 

Attendee Insights

5. Foster Next-Generation Talent

 

According to the survey conducted at the Summit, talent management – including acquiring new skills related to data, digital and environmental, social and governance (ESG) – is the second-most significant challenge asset owners face. Asset owners often play a pivotal role as local champions in nurturing the next generation of talent. This responsibility becomes even more significant in developing economies, where public authorities depend on these institutions to drive domestic investment and technological capabilities.

 

However, this is easier said than done. In some cases, even leading asset owners which benefit from an extraordinarily formidable reputation in their home markets may find it challenging to target a global talent pool.

 

In short, the asset owner community lacks sufficient brand recognition and this needs to change. The growing importance of technology requires asset owners to adapt their recruitment strategy in search of talent with a native technology and innovation mindset – especially at the executive and board levels, where technologists are harder to find. 

 

Where Next for Asset Owners?

As economic, investment and geopolitical shifts continue to gather pace, asset owners are compelled to review and realign their priorities across the organization. Old assumptions about investment strategies and processes need to be rethought, with collaboration across front-, middle- and back-office teams being essential to create a strategy that can leverage external parties, systems and data to nurture innovation and remain competitive.

 

OUR COLLABORATION

BNY Mellon and SLTI join forces to provide best-in-class support and guidance to meet the evolving needs of asset owners. These efforts will include producing thought leadership and insights sharing on key themes including:

  • Tech enablement
  • Portfolio resilience
  • Institutional innovation
  • Data and operating models to enhance investing

Asset Servicing Global Disclosure

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