(pictured: Geoff Warren)
While there is broad agreement among big super funds on the areas they must address in their insourcing of investment management, a new study by the Centre for International Finance and Regulation points to considerably varying opinions about which areas matter most and in what way.
The study (“In-house Investment Management: Making and Implementing the Decision”), which is still a working document, represents a piece of internal research by CIFR research director, Geoff Warren, CIFR chief executive, Professor David Gallagher, and CIFR centre director, Tim Gapes. See the summary here
Warren says that the research to date offers two main contributions to the trend to insourcing:
- A framework is proposed to assist asset owners to make and implement decisions to manage in-house. The framework is based on addressing four elements: capabilities, costs, alignment and governance. It provides checklists of various aspects to consider.
- An account is provided of the approaches and views towards in-house management within the Australian superannuation industry. The research encounters “striking diversity”.
On the surface, there is broad agreement on the key areas to address, including: the return impact; alignment issues such as culture, and ability to tailor investments; the appropriate governance structure; staffing; and systems.
Beneath the surface, opinions vary considerably over how much each area matters, and in what way. The structures under which in-house management are being pursued are also documented.
The study is generally supportive of in-house management. The proviso is that the conditions must be right, and that in-house management needs to be implemented appropriately, including management of the associated risks.
Done properly, in-house management is capable of generating improved net returns; along with increased control over investments, so they might be better directed to member needs and delivered with higher confidence, Warren says.
“A scalable and flexible in-house capability can also establish a platform for the future, by helping funds to address the capacity constraints in active asset management, and hence handle growth in a way that will benefit members.”
The study was based on empirical research and interviews with 20 representatives of big funds, asset consultants and research firms.
It concludes: “The trend towards greater in-house investment management by superannuation funds has much further to run. Continued industry and fund growth, competitive tensions and innovation are all likely to result in an increase in the take-up and breadth of in-house management across the sector.
“The pioneering (and successful) efforts of certain asset owners thus far will provide encouragement. While members should benefit on balance, some bumps and set-backs are to be expected along the way.
“One interesting issue (and possible research question) is the impact on external managers – their pricing, product offerings and engagement – given that they are facing the rise of a powerful new player on their turf: asset owners.”