Getting Closer to the Action: Why Pension and Sovereign Funds are Expanding Geographically

Abstract

There are three major trends manifesting in the business of institutional investment today. First, a growing number of pension and sovereign funds are moving towards a more active role in the investment process by taking a dynamic role in external manager selection and monitoring, or by insourcing asset management functions that would traditionally be managed by external parties. Second, there is a growing number of large institutional investors located far from the major international financial centers. Third, institutional investors are increasingly looking to new markets, industries, and asset classes to generate returns in a low-growth and low-yield environment. The combination of these trends gives rise to some geographic and organizational complexities for these investors, such as accessing talent, local knowledge, and aligned investment opportunities. In an attempt to resolve some of these issues, some investors have decided to launch satellite offices in major international financial centers and/or regional commercial centers at home and abroad. In effect, these funds are expanding geographically, moving their organizations into the markets they find appealing, rather than waiting for intermediaries to come to them, reflecting a broader trend towards the professionalization of pension and sovereign fund investment organizations. In this paper, we document and assess this trend, while also offering a set of principles and policies that could guide investors on their path to greater geographic distribution of organizational capabilities. In forming our arguments, we rely on the findings from twelve case studies of pension and sovereign funds.

Keywords: Pension Funds, Sovereign Wealth Funds, Investment Management, Internationalization