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Ethically speaking
Transparency is another benefit to
internalising asset management.
A frequent criticism by investors
of their managers is that there is
occasional opacity around fees
and performance. Internalising
asset management would therefore
give boards and trustees greater
oversight of what their managers
are doing. Some SWFs and pension
funds are increasingly embracing
environment, social and governance
(ESG) agendas. By internalising
asset management, this would allow
them to better pursue sustainable
investing activities. Internalisation
would ensure alignment of interests
are assured, something that is not
always guaranteed at asset man-
agers. The Invesco paper high-
lighted internal asset management
processes would boost competition
as it would give investors a better
benchmark for their external active
managers’ performance.
While internal asset manage-
ment may sound attractive, it does
not deviate from the challeng-
es facing asset managers more
broadly. While it is true there may
be cost-savings at investors by
launching an in-house active asset
management business, the broader
macroeconomic challenges will
still apply. Macroeconomic policy
is being dictated by Central Bank-
ers, and not markets, while historic
low and negative interest rates
have made return generation very
difficult for all parties. As such, in-
ternalising asset management may
be cheaper in some circumstances
but it may not address the overrid-
ing issue that active asset manag-
ers everywhere are struggling to
make returns in a difficult market
environment. “Returns have been
poor and a number of active asset
managers have done a bad job of
making money for clients. I suspect
some investors are saying ‘I doubt
58
TheTrade
Winter 2016
A S S E T
M A N A G E M E N T ]
“These mid-smaller
sized investors will
probably only insource
vanilla strategies such
as long/short equity.”
OPERATIONAL DUE DILIGENCE
EXECUTIVE AT A MAJOR ASSET
MANAGER IN LONDON.
we could deliver performance
in-house that is any worse than
our external managers.’ Investors
could save a few basis points (bps)
in the process through internalisa-
tion as they would not need to pay
external managers. However, third
party manager fees have come
down significantly over the last few
years,” adds the operational due
diligence executive.
The main advantage of inter-
nalising private equity or being a
direct participant in private equity
type-deals is that the returns can
be more generous for the investor.
Internalising private equity also
has risks. A bad deal or transaction
carries with it materially great-
er risk and larger losses for the
investor. A failure to hire suitably
qualified individuals with proper
private equity experience for these
in-house roles could precipitate
major problems at investors as
well. Delegating investment man-
agement to private equity firms
with risk spread out relatively
evenly across multiple corporate
transactions is broadly safer. How-
ever, a halfway house does appear
to be emerging with some major
investors co-investing with private
equity managers on transactions
in exchange for reduced fees and
the potential for better returns. As
with active asset management, a
failure to hire the correct individ-
uals to undertake in-house private
equity, real estate or infrastructure
can lead to severe consequences
for investors.
The likely reality is that insti-
tutions will not bring all of their
asset management in-house but
retain a fair amount of external
money managers. Such diversifi-
cation is crucial for spreading risk
and achieving long-term return
objectives. “I doubt large investors
are going to become 100% reliant
on their internal asset management
businesses. In other words, they
will not put all of their eggs in one
basket. These investors will be
developing an internal team and
balancing it out with external man-
dates. Both of these processes will
complement each other and they
will be working in partnership,”
says Pearce.