Big asset owners in Asia have in recent years increasingly sought to shift more of their portfolio management in-house, but that is easier said than done, as several institutional investors pointed out during last week’s Asian Investment Summit in Hong Kong.
One of the main aims of insourcing is to save on fund management fees, but it takes a lot of time, money and effort to build effective internal capabilities. It is challenging, especially for smaller entities, and even for large institutions.
Whereas a key focus for a sovereign wealth fund or superannuation fund is investment, that is not the case for an institution like the Hong Kong Housing Society (HKHS), noted the latter’s head of treasury, Alan Liu, during a panel at the AsianInvestor-hosted forum.
Ultimately HKHS is a non-profit organisation (NPO) that happens to have a substantial fund, he said, with HK$38.5 billion ($4.9 billion) in net assets as of end-2017. It does not have a big team of investment experts, added Liu.
The process of insourcing assets can take a long time for NPOs, he said, as there are other challenges to meet in addition to growing the assets, such as implementing a strong governance structure.
What’s more, more external resources are more readily available these days, noted Liu. "The world has changed. Ten or twenty years ago, it would have been difficult for someone like me to go and look for our own fund managers. We relied entirely on our friends in the asset consulting industry to help us.
“But today we have a lot of resources available at reasonable cost,” he added. “I could acquire databases, I could do my own screening, and I would rely on my asset consultants to do more value-added stuff.”
“We would go to them and get sort of more of a philosophical discussion as to how things should be put together, and as to the implementation,” added Liu.
Even large insurers such as China’s Ping An and Italy’s Generali—with Rmb2.45 trillion ($387 billion) and €542 billion ($638 billion) in AUM, respectively—recognise the limitations of insourcing.
“It’s not possible, in my view, for one institution to have all of the expertise in-house, so there will be a mix… based on skill, size, capability and cost,” said Yezdi Chinoy, chief investment officer for Asia at Generali, speaking on the same panel.
Inevitably, certain investments will need to be outsourced to experts who specialise in non-standard assets. The decision has to be considered from a cost-effectiveness perspective, Chinoy added.
Certainly, investing overseas and in private-market assets directly is difficult without using external managers, or at the very least local partners.
Ping An leverages the capabilities of international general partners and engages in co-investments to help to lower the fees and speed up the deployment of capital, said Dennis Chan, head of infrastructure investments for the insurer’s overseas unit, also on the panel.
Of course, many asset owners will continue to bring more investments in-house, up to a point.
Australian superannuation fund Cbus could yet raise the threshold of assets it internally manages from 20% to up to 35% of its $35 billion portfolio. Japan Post Bank has been busy building a team since 2015 to diversify its $1.8 trillion portfolio into alternative assets. And German insurer Allianz quadrupled the size of its Asia real estate investment team last year to eight with a view to doing more direct deals.
These are just three examples of many, but finding suitable talent and having the resources to bring it on board is no easy task.
Institutions need to be of certain scale – at least $30 billion in assets under management (AUM) – to have a proper insourcing programme, said Paul Colwell, Asia head of portfolio advisory at investment consultancy Willis Towers Watson.
And even then they must be aware of the challenges involved.
“Setting up an insourcing programme is a long-term investment,” said Colwell, speaking on the same panel. “It takes time, it requires structural alignment between the various stakeholders involved in the process. You need to build up ecosystems, infrastructure, operational know-how, not to mention the investment skills that go into it.”
For some assets, such as long-term infrastructure, it’s better off to “plug in” what’s already out there, he added.
Moreover, some pension funds are already mature so their assets are shrinking, noted Colwell. “Insourcing in these types of schemes just doesn’t make sense, because the dollar unit cost per AUM goes up as those assets fall.”