Cross-border capital flows are at an inflection point. While in aggregate they have not returned to pre-crisis high watermarks—primarily driven by a significant decline in bank lending—they are increasingly varied in their scope and direction. More countries around the world are seeking and providing capital across borders than ever before. And asset managers and asset owners—not just governments, corporations and banks—are becoming increasingly influential in determining the scale and stability of global capital flows.
Yet capital around the world is being deployed inefficiently—large pools are not getting the returns they should, even as many needs for investment, both public and private, go unmet. This “great mismatch” is driven by a confluence of governments focused on near-term electoral cycles and rent-seeking, emerging-market financial institutions lacking investment management expertise and depth, and investors prioritizing short-term gains over sustainable long-term investment priorities.
Correcting this mismatch represents one of the most significant opportunities for global growth over the next decade. Success will require both long-term institutional investors and policymakers re-thinking long-standing assumptions and re-shaping their role in global markets. This report, produced by Knowledge@Wharton and Prudential Investment Management, provides the backdrop and lays the case for six key recommendations over both the nearer and longer term:
Nearer Term – A New Strategic Mindset
- Re-thinking standard indexing and asset allocation approaches, especially the use of benchmarks
- Updating investment frameworks to better capture true opportunities and risks, including the use of more differentiated metrics beyond the nation state
- Continuing to reduce home country bias where appropriate
Longer Term – Transforming Global Framework
- Developing new valuation tools that better capture the investment opportunity set in economies with sparser and less lengthy historical data
- Establishing consistent standards for governance, transparency and professional investment practices across countries
- Evolving the global governance framework to better represent emerging market economies in multilateral financial institutions such as the World Bank and IMF