SWFs and big pension funds have
been internalising asset man-
agement for a while. We have
seen an increasing number of US
endowments and family officers
look to internalise asset manage-
ment. Admittedly, there are costs
associated with this like building
up portfolio management systems
and purchasing Bloomberg
terminals. However, a lot of the
middle and back office work and
operational due diligence can be
outsourced. As these organisa-
tions are not managing third party
assets, they are not subject to that
much more regulation. However,
these mid-smaller sized inves-
tors will probably only insource
vanilla strategies such as long/
short equity as opposed to esoteric
asset classes,” says an operational
due diligence executive at a major
asset manager in London.
But what are the reasons behind
internalising asset management?
Cost is a big factor. Many asset
managers are not delivering the
returns their investors expect
given the fees they pay. SWFs and
a handful of large pension funds
have the resources to internalise
asset management. Some large in-
vestors are undertaking cost bene-
fit analysis on whether they should
continue outsourcing management
or bring it in-house. If it is cheaper
to conduct asset management
in-house and subsequent perfor-
mance proves solid, investors will
see increased returns as they are
not paying fees and other expenses
to third party managers. Internal-
ising asset management could also
save money on operational due
diligence costs. However, there
would be added expenses such as
new reporting requirements and an
enhanced technology spend. These
are not insignificant burdens and
SWFs and pension funds should
assess whether it is economically
worthwhile to incur these over-
heads.
“Cost is one factor behind bring-
ing asset management in-house but ation. As such, portfolio managers
were unenthusiastic about working
for pension plans as it meant taking
a sizeable pay cut. The cultural
differences in terms of working
environment also did not appeal
another factor is expertise. Large
pension funds and other investors
will be reluctant to allocate funds
to managers that have a limited
track record and meagre Assets un-
der Management (AuM). Some of
the senior investment personnel at
pension funds may want to manage
third party assets in the future and
developing an in-house team could
be a way for them to nurture this
expertise. This is a trend I expect
to see increase following the
reforms in the Local Government
Pension Schemes in the UK,” adds
Pearce.
A challenge faced by pension
funds traditionally was that they
could not compete with major
asset managers on staff remuner- to asset managers acclimatised to
to a fast-paced daily routine. The
due diligence executive disagreed.
“Very few asset managers are hir-
ing at the moment, so ex-fund man-
agers are on the job market,” he
said. Pension funds are increasingly
consolidating as they seek to attain
scale. Discussions are underway in
the UK, for example, to merge 89
local authority pension funds into
just eight funds. The cost savings of
such consolidation – assuming the
policy goes ahead – could be re-in-
vested into internal processes and
personnel. In other words, it could
enable investors to exit a number
of external managers and increas-
ingly manage capital in-house.
Winter 2016
TheTrade
57