Insourcing asset management has the potential to reduce costs for super funds, but any savings can be “easily eroded” via a poorly-executed strategy, says Frontier Advisors.
In a new paper titled Navigating the Insourcing Trend, Frontier Advisors head of practice Kerrie Williams and analyst Sarah Cornelius discuss the challenges and benefits of moving asset management in-house.
According to the paper, in 2013 the top 10 largest sovereign wealth funds managed 62 per cent of their assets in-house (citing the Institutional Investor’s Sovereign Wealth Center).
In Australia, AustralianSuper currently manages 19 per cent of its $99.5 billion portfolio in-house – with QSuper, UniSuper, REST, Sunsuper, Telstra Super and MTAA also listed as significant insourcers.
AustralianSuper has stated publicly that it is targeting having 35-40 per cent of its assets managed internally by 2018 and lowering its asset management costs by 0.15 per cent to 0.45 per cent, said Frontier Advisors.
“Funds starting an insourcing program often do so in areas such as cash, fixed interest and domestic equities (often passively managed to begin with), where there is less complexity,” said the paper.
“However, some of the large and more established international funds have instead opted to focus on asset classes where they believe they can generate the most significant cost savings and insourced asset classes requiring more specialised knowledge such as private equity, infrastructure and property.”
The decision to manage assets in-house should only be made once a super fund has achieved sufficient scale, said the paper.
“It is a complex issue and one that needs to be carefully and thoroughly considered in relation to the objectives, size, business mix and complexity of the individual fund. Ultimately, there is no 'one size fits all' approach to insourcing,” said Frontier Advisors.
“While cost reductions can be achieved by insourcing if there are sufficient economies of scale, these can be easily eroded by the losses incurred by a poorly-executed strategy.
“However, a considered and well-executed insourcing approach has the potential to reduce costs, facilitate a stronger connection between the philosophy of the fund and the way it is invested, and help a fund improve net outcomes for its members and beneficiaries,” said the paper.
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