In a superannuation landscape where downward pressure on fees is a constant challenge, an increasing number of funds are seeking to gain a competitive edge by bringing parts of their investment management in-house, writes Bravura Solutions' Daryl Wright.
Traditionally, Australian super schemes have engaged specialist fund managers to manage money on their behalf across a range of asset classes – equities, bonds, cash, property and infrastructure.
However, more recently, a number of funds have been bypassing external managers in some instances, choosing instead to hire their own teams of professionals to invest money directly.
Telstra Super was among the first to break away from the pack and has for decades managed a considerable portion of assets internally. Other super funds that have followed suit in recent years include UniSuper, QSuper, AustralianSuper, MTAA, Christian Super and Equipsuper.
In July this year, Cbus became the latest fund to announce its intention to manage some of its assets directly.
It’s worth taking a look at the pros and cons of such a move. On the upside, in-house investment potentially delivers funds increased flexibility to respond quickly to market changes.
Further, by eliminating third-party management, direct investment can reign in the considerable costs associated with engaging, administering and overseeing external fund managers.
By cutting out the middle man and significantly reducing provider costs, the stage is set to pass on these savings to members in the form of lower fees, which in turn increases a fund’s attractiveness and competitiveness in the market.
This scenario has played out for AustralianSuper. In August, the fund was named 2015 Industry Super Fund of the Year in recognition of its strong performance and low costs to members. In pursuit of keeping costs down, the fund has been managing some assets in-house since 2012.
According to AustralianSuper chief executive lan Silk, the internalisation of asset management will deliver estimated savings of around $150 million a year for members. He says the funds aims to have around 35 to 40 per cent of assets managed in-house by 2018.
Several other funds are also managing around at least a quarter of their assets internally.
However, taking investment management in-house is not without its challenges. Assuming more direct control over investments involves increased responsibility for super funds, both operationally and technically.
Key challenges include effectively managing different asset classes, ensuring regulatory compliance, aggregating fund views from various external portfolios and communicating the value of in-house funds management to the client base.
It seems that super funds are taking a prudent approach to bringing fund management in-house by only choosing those areas where they feel confident they can build and maintain their internal capabilities and where they think external management offers little advantage.
While there is evidence that direct management can significantly reduce provider costs, only time will tell whether it can match or exceed the fund performance of external specialist managers in the longer term.
Early signs though are promising, with at least one fund achieving double-digit returns with this approach.
For some super funds, realising the opportunities inherent in direct investment management, as well as meeting the challenges, will require them to employ a modern technology solution.
Legacy systems or manual processes simply do not have the flexibility, functionality and operational efficiencies that super funds would need to manage investments in-house.
In the asset administration systems market place, funds who choose to in-source administration should look for a single, unified solution that caters for comprehensive asset administration and investment management – one that allows investment managers to differentiate their products from those of their competitors, as well as realise economies of scale to reduce costs.
Ideally, the solutions should feature a comprehensive tax engine that can provide funds with enhanced tax reporting and management, such as attributing tax at the member level.
In the years ahead, the funds that will be most successful at bringing investment in-house, reducing costs, lowering fees and sustaining healthy returns, will be those that not only engage the right team of investment management professionals, but also support this team with a state-of-the-art system solution.
Daryl Wright is the head of strategic marketing at Bravura Solutions.
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