A Critical Moment for Public Asset Owners

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Senior leaders at public asset owners, including sovereign wealth funds, public pension funds and central banks, face a once-in-a-generation moment. Old assumptions that helped guide their strategies have started to lose relevance. Technology and innovation have created new demands while allowing public asset owners to reimagine what is possible. In addition, stakeholders and beneficiaries of public institutions have new expectations, such as sustainability and transparency. These high pressures for change will draw a clear line between the present and the future. Public institutions must and will radically transform.

Yet these changes also represent an opportunity. Public institutions that succeed in breaking out of old patterns will play a new role in financial ecosystems and amplify the impact they can have on society more broadly. To understand this transformation, BNY Mellon interviewed more than 90 senior leaders from almost 50 institutions globally (excluding the United States), representing nearly US$9 trillion in assets. In addition, we collaborated with the Official Monetary and Financial Institutions Forum (OMFIF), a leading think tank among public investors, to survey public asset owners on their operating models. We can summarize our findings as follows:

Public asset owners seek more boldness and creativity in searching for yield. 
 

• Almost all are actively exploring new asset classes, products and investment strategies. Central banks are extending into equities, while public pension funds increase allocations to alternatives and sovereign wealth funds test digital assets and take more active roles in shaping market structure.
• Securities lending is on the rise, and one-third of those surveyed will initiate or expand programs over the next five years. New tools and market models help them alleviate concerns, supported by shifting regulatory winds and more flexible systems.
• Nearly 70% have taken on sustainability-themed or impact investing. While adoption and approaches vary widely, most are embracing environmental, sustainable and governance (ESG) obligations. However, the availability of reliable, transparent and comparable ESG data remains a challenge.

Public asset owners are willing to reexamine and redefine every element of their operations.
 

• Only 6% of survey respondents are satisfied with their operating model. As public asset owners look to optimize yield, they face complex choices between operating model simplicity versus purposeful customization.
• A solid majority (63%) have begun operational transformations. To meet changing public demands, investment mandates and portfolio models, public asset owners are adapting or overhauling their operating models that enable the front, middle and back office.
• Over two-thirds (68%) will change the balance between internal and external portfolio management over the next five years. Approaches vary meaningfully, with no single answer as to the right mix of internal versus external portfolio management. Typically, institutions externalize to gain experience while they internalize to reduce costs or build permanent, local capabilities.

Digitization lies at the root of innovation and change.
 

• 60% view data integration and end-to-end visibility as top priorities. Public institutions have begun to account for the importance of data, seeing the ability to seamlessly digest, analyze and apply data insights across the front, middle and back office as a source of alpha.
• Senior leaders consistently highlighted five common data challenges.
  1. Clarifying purpose
  2. Addressing fragmentation
  3. Accounting for diverse data types
  4. Standardizing reference data
  5. Fostering a data culture.
• Technology discussions center on the promise of cloud computing and the challenges of cybersecurity. While political sensitivities and security concerns led some to use only local servers, new national solutions and the promise of future scalability are prompting a shift to the cloud.

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